What do investors understand that many startup founders don’t?

Alexander Jarvis

2 years ago

Market size wins: If the market isn’t huge now or at the point of inflexion, whatever you do doesn’t matter
Team matters: Most people are average. Generally, only exceptional founders, who know hiring (Think Jobs) to make the company smarter is the key to success. 70% of an investment decision is the team. And frankly, I think wannabe angel investors if they aren’t sure, to just take a punt when they come across a team that is AAA
Timing is key: Doing the right thing at the wrong time is pointless. There needs to be a reason why this couldn’t have been done before (1–3 years before)
The idea doesn’t matter much: There is a reason investors don’t care about NDAs… your idea doesn’t matter. Your idea will change. Here are 15 startups that pivoted to fame. I’m talking Youtube, Twitter, Shopify etc.
It takes a long time to build a valuable company: We are talking 7 years. A meaningful startup exit for a founder is not the same thing for venture capitalists. They want founders passionate to make their business model work.
Investors actually like, understand the terms: I’ve been in a meeting where the prospective VC explained how terrible terms were in the founders benefit with confidence.
Control rights matter: There are two types of terms– control and economic. Founders focus on economics (e.g. valuation). The VC joke is you can pick the valuation if I can pick the terms. Control rights matter as you get larger almost more than economic ones.
Current competition aren’t that important long term: What and how you do what you do matters. Who you think your competition are now won’t be your competitors if you break out. If you have a smarter model and you execute you will win. Think Uber vs. taxis. Taxis are lazy and refused to innovate.
Competition is for losers: You ideally want a winner takes all market. You want to blow everyone out of the water long term to have supernormal profits. That’s hard but possible (and valuable)
You can be fired: The only real lever a board has is to fire the CEO. Lame investors in Asia don’t have the balls, but most US VCs won’t think twice about bringing in a new team if it makes sense. Note: there is a strong preference for keeping founders.
Option pool shuffle: Larger ESOP pools decrease your effective pre-money. A larger pool is just a valuation negotiation.
Growth over profitability: Even in public markets, investors still have a far higher valuation multiple on growth vs profitability. I’ve built a SaaS valuation calculator which largely works… but I haven’t figured out the multiple for high growth to make it work. Just saying.