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.
- 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.
- 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?
- 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?”
- 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.