This secret is simpler than you think! And it is not about investor money.
Several weeks ago, I took part in a Startup Pitch Contest for Eastern European entrepreneurs, hosted by NYC-based Starta Accelerator. I was invited to judge the third batch of startups and assess their chances of raising funding in the United States.
In short: The event was awesome.
All startups pitched impressive ideas that have huge potential to make a difference both locally and globally. I was amazed at how on-topic these entrepreneurs were, and it got me thinking about startup pitches and founders of “groundbreaking” startups.
The thing is, I own a digital marketing agency and get offers to join or invest in startups every once in awhile. For over 10 years, I have seen cases where impressive ideas failed because of poor execution, while “me too” companies succeeded because of strong team and vision. I’ve learned to tell the difference between good and bad startup ideas.
But what about investors? Can they distinguish good from bad startups?
I don’t think so. They definitely know how to invest and do business. They can tell a good idea from the bad one. But they can be pretty bad at the technical stuff. It’s no wonder that, every year, billions of dollars are put into startups that don’t work and never will.
In this article, I will set the record straight and help investors distinguish good from bad startup ideas. I will also share my thoughts on what startups are, solve the mystery of startup investment and describe five types of startup founders you should never do business with. Let’s dive in!
What Is a Startup?
To begin, let’s answer the question, ‘What is a startup?’.
According to Wikipedia, a startup is a newly emerged business that grows fast and tries to solve critical pain points of its targeted audience. Startups get launched, develop and grow based on a predefined strategy. I agree with this definition, at least in part.
While a startup isn’t necessarily a recently launched business, it has to grow. It has to provide real value to people with its products or services, period.
Nobody wants to invest in just ideas. Why?
Ideas don’t sell. Ideas – without execution – don’t make you rich. They are valuable only when you are ready to put in your creativity and sweat, execute on your ideas and obtain measurable results.
Remember: Idea + Strategy + Execution + Profit = Startup
Don’t get me wrong, though. I don’t want to discourage you from brainstorming startup ideas. All I ask is, don’t demand money when you have nothing except your idea.
Patience and hard work are key. Don’t invent success, prove it with figures. And, please, don’t become one of the typical startup founders listed below.
Five Types of Startup Founders You Need to Avoid
The Next-Uber Fan
I’m pretty sure that all investors know this type of founder. He or she is adamant that their idea is destined to change the world or, at the very least, disrupt entire industries. Unfortunately, companies like Uber, Facebook or Instagram are exceptions to the rule, and people who can really make a difference on a global scale are few.
I believe in people; the next-Uber and next-Facebook are due to appear, but I have no doubt that their founders will be very specific about their ideas, goals and strategy when their time comes to approach prospective investors.
You can’t simply come into your investor’s office and say: “I want to create the next Uber in the legal industry. Give me money, please.” Miracles like that don’t happen. Even if you do have the next-Uber idea in your pocket, you will fail to raise funding because you don’t provide any details: no strategy, no plan and no minimim viable product (MVP). You have pretty words, but that’s it. Nobody invests in words.
Help your prospective investors figure out what your idea is all about. They don’t give you funds for the sake of your world-changing idea; they invest money to make a profit from it.
Investor Tip: When a prospective founder contacts you seeking funds for his innovative startup, be sure that he or she provides enough detail to support this idea. “Next-Uber in something” isn’t enough. Search for Uber-for-X apps and think of how many of them failed miserably. Demand measurable results and don't believe mere words.
Global Success Fanatic
Asking “What niche are you going to target?” is enough to identify the so-called “global success fanatic.” For this founder, prioritizing one single niche is too small; they are here to conquer the world.
Going big isn’t necessarily a bad thing but, with startups, it makes sense to focus on one industry first, and then, step by step, emulate that success in other industries.
As a startup founder, keep risk in mind. Chances of success are pretty slim, so always test your idea before implementation, choose one niche to cement your position and, only then, go global. Otherwise, you risk losing funding and ruin your chances to find another investor any time soon.
Investor Tip: If a prospective startup founder wants to target multiple, highly competitive industries, he or she should be able to prove their startup’s viability in figures. Don't believe in “unrivaled, innovative products”. Demand stats, market research or any proof at all. Failing this, you risk investing in a project that targets every niche and fails in all of them.
Secret Intelligence Agent
Startup founders who have ideas but no actual goals or plans are fairly common. However, there is a difference between founders who are clueless about their strategy and founders who have a plan but don't want to share it with you. They ask for money but prefer to keep their secrets to themselves.
As a business owner, myself, I realize the importance of keeping important information private. Obviously, you don’t want anybody to take advantage of your startup idea. But, you also have to think from an investor's’ perspective.
Nobody is going to give your funds on a wing and a prayer. You have to show how your startup is going to make money or, even better, demonstrate that it is already profitable. Being too protective of your ideas will discourage investors.
Investor Tip: You might be contacted by this type of founder every now and then. Demonstrate to them that you can be trusted. If necessary, sign a non-disclosure agreement. After all, an idea that is protected so vehemently might be valuable.
I can’t help but mention the fixer-upper type. Basically, these are owners or representatives who seek funding for a startup that is “already finished but needs some final touches and fixes”.
This founder may really have an impressive product and needs additional funds to polish and launch it. However, in most cases, when you start digging deeper into the details, you quickly realize that it actually will take at least a year or two to finish the project.
I recommend investing in startups that are ready to hit the market in months, not years. After all, in two years from now, there might be dozens of similar businesses competing in the marketplace.
Investor Tip: Ask a startup founder to provide a technical design specification. Run your own analysis to determine when the project will be ready for launch. Don’t believe anybody who demands money but tries to convince you that they just need to fix a thing or two. If so, they would have already done those fixes and hit the market without your money, right?
A Man of His Word
This is one of the most common types of startup founders. These men and women raise funds for projects that are, well, unprofitable. Yes, these startups are already operating but haven’t made a dollar. If a startup in the Ideation Stage may have potential, this one is already a failure.
As a founder, you should have faith in your business, but please don’t take advantage of investors. If you truly believe in your idea, offer investors a strategy for how you are going to bring your existing business model into existence. Nobody is going to give you funds to keep doing things that have proved to be unprofitable.
Don’t call any company that just loses money a startup. Yes, startups can be unprofitable at the very start, but, to succeed, they should have a sound strategy for the future. A founder has to know how he or she is going to need to renovate the existing model and grow the company. If they don’t, well, you shouldn’t invest in their startup.
Investor Tip: Be aware of startup owners who try to sell you on the idea that it is completely OK to lose money as a startup. Consider investing in startups that have a detailed strategy for getting back on track. Putting money into businesses that are already failures is just insane. Don't do it.
The Secret of Startup Success
The list above may have triggered you a bit and I know why.
The generally accepted concept is that (a) startups are all about innovative, top-secret ideas that change the world; (b) startups are fueled by investors’ money up until they turn a profit. But this concept is entirely wrong.
While some startups have to raise funds to get going, most of them aren’t worthy of receiving money. There might be too many groundbreaking, revolutionary ideas around, don't you think?
A startup isn’t a huge furnace to throw piles of cash into. Investing in a broken business just because it calls itself a startup is insane, but many investors follow this route anyway. They allow self-proclaimed business gurus to trick them into believing that money-losing companies can magically turn into a golden goose. Sooner or later, they will lose and lose big.
Just remember this: A startup is a profitable business that needs investors’ money only to scale their existing success. A startup can be called a success when it is profitable and capable of putting out a product that people crave. A startup is a company that survives without having to squeeze money from every investor they encounter.
Karl Benz with an idea of designing and engineering a motorcar isn’t a startup, but Karl Benz who has already patented his car idea and proved its value is definitely a startup. Remember that when you receive another idea that is going to “revolutionize the world”. You need facts to even consider the possibility of investment.
So, what is the real secret behind successful startups? Profitability and performance. No strategy and no profit should equal no investment. This is reality and how things work. Period.