Many VCs will tell you the qualities they look for in a successful entrepreneur, but not many will tell you the red flags that keep them from investing in a company.
That latter are probably equally if not more important than the former, because many successful venture capitalists see hundreds of proposals for every one they fund. Getting yourself into an entrepreneurial mindset if you don’t naturally have one is part of your early-stage work.
VCs like to say “I’d rather be lucky than good!” and there’s a huge element of luck in this kind of high-risk investing. As a report from the Kauffman Foundation famously pointed out a couple of years ago, the vast majority of VC funds product below-market returns for investors. Yet, there is skill in this kind of investing, too. We don’t have the data yet to articulate how good VCs make decisions, but sometimes, you can get a glimpse of their decision-making via a conversation.
Storm Ventures, founded in 2000, is an enterprise VC firm. It backs b-to-b startups, companies that build software to help other companies do their work, whether its marketing or cloud-based sales. Among its successes are Airespace, which was sold to CISCO, and berkana, whichwas sold to Qualcomm, and Marketo, now listed on the NASDAQ. The company, which has been around since 2000, has invested in 17 startups that were acquired and four IPOs, according to Crunchbase. Some of its current investees, according to its web site, are AirPlug, Modo Labs, Restorando and Rafter. I met partner Alex Mendez while I was reporting this story about a group of VCs and entrepreneurs who are investing in Latin American startups.
I’m perennially curious about how difficult it is for VCs to say “no” to hundreds of aspiring and good entrepreneurs that pass through their doors. I asked Mendez and his answer was much better than most I’ve heard: that he makes decisions in part based on the entrepreneur’s mindset. If that person is going to fail as an entrepreneur, Mendez said, Storm Ventures wouldn’t be doing that person any favors by investing.
So here were some of the ideas that emerged from our conversation — a handful of the red flags Mendez sees in people who aren’t thinking yet like the entrepreneurs they need to be.
1. You want to hire people.
Surprising, right? Of course, you want to hire people. But someone in a big-company mindset approaches a startup with the idea of coming up with a lot of roles or functions necessary to build the company, and then slotting people into them, said Mendez. A lot of entrepreneurs do all the jobs themselves in the beginning; when they seek funding, a good one switches in to the mode of thinking about how to hire the best tiny handful of talent. “It’s not: how do I build a marketing organization. It’s how do I hire the best black belt in marketing,” said Mendez.
2. You’re focused on money, not milestones
To Mendez, the amount of money you need is secondary. The key question is how much time it will take a company to reach certain milestones. Maybe it’s the number of customers or a certain revenue figure, but the question is how long you’ll need to hit those targets. Here’s a blog post where he discusses this more.
One of the qualities I’ve noticed in successful entrepreneurs is that they have thought through the element of time. They’ve used it both to empower themselves — as a pressure and a guide. They use time as a hard boundary to help them recognize when something isn’t working. And they are often extraordinarily hard-driving when it comes to deadlines.
Related to that:
3. You haven’t thought through how much you need
Maybe you have a dollar figure in your head based on how much money you need to pay salaries of your key people, or (worse) you’ve looked at competitors to see how much they have raised in some sort of keeping-up-with-the-Jones mentality. Those kinds of answers to the question of “how much do you need” are one clear sign you’re not ready yet.
4. You aren’t retaining talent
Mendez tossed this idea off at the end of our conversation. It sounds obvious, but then good people who fit the culture you’re trying to create keep walking out the door, you have some kind of huge problem. Perhaps your idea won’t work, and the people inside already realize it, or you haven’t structured your equity compensation the right way. Or — I’ve seen this happen, too — you’ve created such an intensely uncomfortable working environment, because it’s sexist or workaholic or bullying, that even motivated people can’t stand it.
5. You aren’t exact with your dollar figures
“Having that sense that money is very precious,” said Mendez. You can’t afford to think about money amorphously, because every dollar helps win you more time to establish your company. That doesn’t necessarily mean squeezing dollars, though the good entrepreneurs I have known have been obsessive about money.
Mendex admitted to a soft spot for an entrepreneur who’s been bootstrapping a company, though that’s not necessarily a sign of success or failure — more a determinant of style. “If you grow up in that kind of environment, you’re a street fighter,” he says.
Mendez, an Argentinian by birth, put himself through Stanford, installing saunas to help pay the bills.
One deal-breaker for him in terms of funding an entrepreneur: a lie. Of course, many successful people like — so he’s quick to note that this is only a personal objection.
“If somebody lies, even a white lie, that’s it,” he said. “Life is too short.”
This article was written by Elizabeth MacBride from Forbes and was legally licensed through the NewsCred publisher network.