Investing in any company at inception stage is not a decision to be taken lightly. Thinking logically it would seem that investing in the brightest and most interesting idea would generate the most ROI in the long run, however, the idea isn’t everything. It’s often the drive and ambition of the person behind the idea that takes the business to the next level.
As a pre-seed investor, I invest at the riskiest stage of a business, when the business is literally someone’s thought or only in a business plan. I speak to over 100 entrepreneurs a month, all with new ideas, so choosing the venture with the best chance of success is not easy.
Whilst it’s the initial idea that is the trigger for any investment conversation I have, my attention very quickly turns to the person or people behind the idea and their ability to execute successfully.
Finding the right person to invest in at this earliest possible stage is arguably far more important than at any other stage of the business because it’s principally this person that will be responsible for converting the idea into reality, which is no mean feat given that startups have a 20% chance of success over three years, according to government statistics.
I speak to over 100 entrepreneurs a month, all with new ideas, so choosing the venture with the best chance of success is not easy.
Given it’s the people that make the idea happen, I look for as many clues as I can that this person has what it takes to achieve success. I’ve got to base this decision on what has and has not worked well previously because I’m making an investment decision. I have rejected many ‘great’ ideas because I did not feel the people behind it had the right characteristics to execute that business.
So, what are the clues that to look for?
First and foremost, I look for clues that the individual or team has the right degree of desire and perseverance with the ability to come back from setbacks. Startups are hard work and they often feel more downwards than upwards for the first few months, so being able to work through the hard period and persevere is the key to being successful.
People that do not have a good quantity of both tend to give up at the first hurdle; those that have plenty will jump over several hurdles and are much more likely to succeed. Sometimes this perseverance and desire means people I have rejected come back to me in an improved position, whether it’s through making progress regardless of the rejection or through a better understanding of their market consequently leading to a positive decision. I try and gauge a person’s approach and determine their background.
First and foremost, I look for clues that the individual or team has the right degree of desire and perseverance with the ability to come back from setbacks.
Looking at the past experiences of an individual is also crucial when making an investment decision. For example, somebody from a predominantly corporate background with a very specific role may struggle in running a startup because suddenly they have a number of things to juggle, which can be overwhelming to somebody that isn’t used to this way of working. These types of people are often used to delegating, which can make them risky prospects for potential investors who are looking for candidates that have their ear on the ground in the initial months. It’s important to look for clues that people can adapt to life in a startup that has shown the ability to multi-task and deal with several pressures at the same time.
Whilst passion is admirable and often essential to ensure success, an overly ambitious entrepreneur can on occasion be a self-destructive and risky investment prospect. It’s important to look for somebody with a mature outlook who is more likely to build on strong foundations.
For investors that are more hands on with their ventures, the ability to listen, digest and make an informed decision can be a very appealing trait in a business owner. Not being able to take on feedback and being set on following a strict path regardless of what evidence or advice they’ve had to the contrary shows that the entrepreneur is less inclined follow your guidance and therefore could prove to be a loose cannon.
Ultimately, backing the right person is often a crucial decision between success and failure for an investor. Whilst a solid idea and strong business plan are important, it will essentially be the person who brings that plan to life.
There are lots of other triggers or clues that can tell you what you need to know about that person. I look at the strengths and weaknesses of that individual and whether or not I should back that person. In short, when I choose to invest, it’s 99% the team and 1% the overall idea.