Early Stage Investing Trends

Karl R. LaPan, President and CEO of The NIIC

One of our NIIC board members shared a sobering but realistic article with me called “The Early Stage Slump“. Today’s reality- Inflated early stage valuations are/were unstainable and the early stage bubble did burst.

This article makes a number of important points about the investor appetite for getting into a deal early. The article opines that investors are being more selective in their investments and moving upstream toward Series A type investments.

The article reminds me of 4 key points that should be kept in mind by entrepreneurs as they decide on their funding strategy for their business.

  1. You must price your round appropriately. Given investors have to plan to lose 60-80% of their investments, they need to structure for a 10-30x (article says 20, but many strive for 30) to get the winners to cover the losers. Realistic pricing may make the difference between a successful, fully subscribed round and a seed round that can’t get off the ground (historically, about 1 in 7 early stage deals looking for money actually get any). Entrepreneurs need to remember – valuation is not about what ownership percent you are willing to give up but about a reasonable price with appropriate investor upside for the risks inherent in your business model.
  2. Management team matters. Track record, credibility, domain expertise and founders with self-awareness and coachability will win the day with potential investors. Investing at this stage is all about the jockey. Serial entrepreneurs preferred. Remember, if you take outside money, you have a boss. Are you ready for that reality?
  3. Executing a robust, dynamic, and winning business model is essential. A business model with multiple bites at the apple will distinguish itself from the one trick ponies. Pivoting is a badge of honor not a mark of shame. However, pivoting fast and cheap is the difference between a savvy team and a likely business failure or false start. Execution is paramount and key. In a 2015 HBR article entitled, What is a Business Model, “A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
  4. A focus on finding & securing customers goes a long way to validating customer pain. Paying customers absolve lots of early-stage commercialization sins. Finding paying customers who buy into your solution as a means to solve their pain/problem is a big step forward in validating your business model. Answering the question, what does your customer value (and what are they willing to pay for), is critical to success.

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