Business is like war, they say. And like any war, there should be a well-proportioned hierarchy pyramid. Can you imagine going into a battle where there are more platoon commanders than foot soldiers? Or more generals than commanders? Some economists say 9 out of 10 businesses fail in the first 5 years. For every one that survives, 9 out of 10 of them will fail in the next 5 years. Though some say the figures are much better.
But as natural as gravity is in physics, that there will always be more at the beginning than there will be at the end — forming a pyramid shape. Forget about all the talks about a series B or C gap. We have a bigger issue. Our current state of startup financing is an inverted triangle. Or at best, maybe a Melissa McCarthy shape. Like any 5 years old would know, it wouldn’t balance.
While Singapore is looking to create the next unicorn, we need the most ideas to experiment and complete at the beginning. Yet we have only a handful of VCs that look at the seed stage. To complicate things further, there are issues we need to address towards potential elitist or access to funding problems.
The first obstacle many founders face is having the correct networks. Without the right connections, startups are unable to even knock on their doors, leaving many potential game-changing ideas to never see the light of day. If we are to believe the social mobility should come to all, that ideas and entrepreneurship can change the world, we will need to give aspiring entrepreneurs more alternative tools & channels to raise funds. This would also, in turn, level the playing field for all startups and greater transparency in investing. Problems and therefore solutions should come from all walks of life, yet there is a fatal assumption that the only companies worth funding are those with insider networks.
Yet we wonder why there is a diversity issue
The second concern is you need to have some track record and is best illustrated in the book Thinking fast and thinking slow, which explained how humans are inherently used to making assumptions. We like to be able to make decisions and judge something quickly. A ‘rule of thumb’ helps in decision making, allowing us to move through the day quickly. Imagine having to take the time each time to deliberate which shoe, the left or right, to put on first
Funds are often quick to sell their previous success to excited investors, yet now we have compulsory disclaimers like “past performance is not indicative of future success,” (And just like con men always flaunt their supercar, we are just drawn to the visage of success thus making the trick effective).
If the startup scene is always the been-there-done-that, supporting the been-there-done-that, we will end up with “inbreeding” of money, financing the same group of people with the same school of thoughts and similar background.
We also often end up with broad stroke evaluation methods that serve no purpose and make no sense in another similar context. Which leads us to the 3rd concern, the kind of questions that investors ask to hastily size up the prospect.
A question that investors frequently ask is how much have you invested in the company as a founder
They do that to size up if the founders have skin in the game. But how does how much prove any of that? To some people, ten thousand bucks is a lot. To others, it’s just spare change. You want to know how much a founder stand to lose? Get to know them on a personal level. Ask them what motivates them and why they believe in their beliefs. Ask them how many sleepless nights they had, what they have to give up to embark on this journey, how many times they need to sit their family down and look them into their eyes and tell them — “trust me”, yet deep down inside, they wonder. Because if anyone can predict the future, they would have joined Warren Buffett or fought along-side with John Connor.
Another interesting question that investors frequently like to ask as well is, “Do you have a co-founder?”
It seems that investors find safety in number but it has been shown that 64% of startups fail due to internal conflicts between founders.
Concerns about sole-founders are like suggesting that it could due to the first founder unable to convince another person to join the team, and therefore something is wrong. Try going to a party and starting asking the ladies that look like they are above 30 years old – if they are single, and if they reply yes, shake your head disapprovingly. You would think that is not appropriate. Or like suggesting all single moms or dads are unable to raise their children properly by their own
A scientist is trained to always remember that correlation does not imply causation. Sometimes there is no one size fit all questions, and just like entrepreneurs need to understand their audience, investors need to take the time to understand theirs too.
Investors need to know what are they investing into before asking for an MVP and founders also need to stop recommending bootstrapping to every other fellow founders as the first and only solution no matter how well intended it is. It is like a doctor that after a brief 8 seconds, recommends aspirin, no matter if you went there with the flu or just a heartburn and whatever home remedy you have already tried to no avail.
Some ideas just can’t be bootstrapped
An internet idea could be tested with the first few hundred users in its raw form while no one would buy a car incomplete without all that a standard car would possess even if it’s next-generation AI safety feature you are developing. An MVP means a product in its simplest form to test a product-market fit. But as Albert Einstein put it:
Everything Should Be Made as Simple as Possible, But Not Simpler.
Not every idea can be bootstrapped and sometimes it is just pointless to put a half-baked product out on the market.
Companies pay ad agencies good money to come up with good creative ideas. Companies attract talents to bring fresh ideas and perspectives. Often more than the rank and file that labours. Execution is equally important but without a good idea, there will be nothing good to execute at. Startups give advisers equity, but when it comes to investing, often we say that it’s just an idea.
If disruption is the buzzword, then we need to have a mindset change and we need to have more players vested at the very beginning
We have many business mentors looking to guide the next generation of entrepreneurs and future leaders. But unless more is willing to put their money where their mouth is, that is just rooting for you at the finishing line and celebrating your success, compared to a trainer that runs with you and pace you. Just like in insurance, there is a span of control — 15 managers to a director and 15 agents to a manager to ensure quality training. We need to ensure there is a quality relationship and not touting who has the bigger guns with the same names appearing again and again in multiple incubators.
Just like fundamentals trading is usually harder than technical trading, there is so much more work to study the landscape and macro-economics of an industry whereas for technical, the same “head and shoulder”, “triangle break out” can be applied to any stocks and even to bonds, FXs and commodities. Limited partners can also help to change that by willing to take a closer look at VCs that are willing to take the time to look at early stage companies. It could be risky but then again, risk is subjective especially if you know what you are doing.
And if you don’t ever go out on the branch, you’re never going to get the best fruit.
e27 publishes relevant guest contributions from the community. Share your honest opinions and expert knowledge by submitting your content here.
Featured Image Copyright: bankrx / 123RF Stock Photo