You’re not a startup.
That’s right. You are NOT a startup. And that is one of the reasons why you cannot get any funding from angels or VCs.
Startups have very specific characteristics that investors are looking for. Depending on the stage of the investment, stage of the company, region of the investor the numbers can vary but the basics are the same.
An investor wants to see a return of 8x to 10x their original investment in 3–5 years… or less. If you don’t have an MVP yet — it’s more like 20x in 5–6 years. If you have already got customers and are looking to grow, it’s 4x-5x in 3–4 years.
Newsflash: Not only does an investor want a significant return on their investment in 3–5 years, they want a way to get that money back. There has to be some way for them to exit your company and to crystallise that gain. Exits can be through an initial public offering, acquisition or share buy-back.
No way to get the investor their money back, not a startup.
I see pitch decks — a LOT of them. One of the most common problems I have with investment pitch decks is that they are overly focused on the product and the impact they will make on society. Those are great pitch decks for customers and for teams — but they aren’t for investors. Investors want to know about your business because that is what they are investing in.
Newsflash: The majority of your investors care 10% about your idea and the good you will do in the world and 90% about the security of their investment and the potential for a big payout.
If your entire pitch deck is about how you are going to help people and make the world a better place then you should be looking for charity funds and government grants — not angel or VC money.
Not focused on the business, not a startup.
In order to achieve these types of returns the business — not the idea, not the product but the business — must have a particular growth trajectory and must be addressing a specific size of market.
For the first 18 months you should be running in the red spending more than you are making because you are either pre-revenue or have only small revenues. The cash being spent is being used to build the product, prepare the marketing and get the business ready to grow.
At 12 months you should start making money and 6 months after that you should be at cash flow neutral or break even. i.e.; your revenue and your monthly expenses are equivalent.
At 36 months you should be solidly in profit and have just figured out how to activate your growth multiplier.
Newsflash: Your growth multiplier is the marketing hack you implement that successfully provides a step change in your most important business metric. You can also think of it as the elbow in the legendary forecast hockey stick.
No hockey stick, not a startup.
Next, the $100M+ market opportunity. You have got to have a huge market that you can address. The market must be >$100M. And let me be clear here. If you make windscreen wipers you cannot claim that your market is the entire auto industry. Your market is new and replacement windscreen wipers. Investors are not stupid so do not try to find a >$100M market just because someone told you that you need to have $100M market opportunity on your slide.
Newsflash: There are plenty of $100M+markets out there. When you look at the problem you are solving you have to look at how much money you can make or save for the customer and how much money they are spending already on another solution that can be revenue to you.
Not got a genuine $100M+ market opportunity, not a startup.
“OK Wise-guy.” I hear you say. “If I’m not a startup, what am I?”
Great Question.
You’re either a CSB, CSE, YL or a CIC (Gotta love acronyms)
CSB: If you expect your revenue to be $300,000 with profitability of $60,000 after 5 years, you are a classic small business. For finance, get a loan. You won’t need much capital and you can borrow against your house or borrow from your rich aunt. Some people will call this a lifestyle business. Lifestyle businesses are great. There are 10s of thousands of people running CSBs and making a good living. They are the backbone of the economy. But they are not startups.
CSE: If you expect your revenue to be $2,000,000 with profitability of $400,000 in 5 years, you are a classic small enterprise. Bigger than a lifestyle business with potential to grow and maintain profitability, the CSE doesn’t have the market potential of a $100M+ market to address and will never achieve the growth multiplier to get that magic “hockey stick” growth path. The big thing about a CSE is that CSEs will run for a long time. And that means that there is never going to be a chance for the investor to get their money out. CSEs are great. They employ lots of people and are good corporate citizens. But they are not startups.
YL: If you expect your revenue to be $250,000,000 with profitability of $20,000,000 in 15 years, then you are a Young Legend. Think General Electric, BMW, Nestle. These are huge multi-national conglomerates. They are monsters — but they didn’t get their overnight. They took time to grow. They required consistent steady year on year growth. They trundled along for the first 5–10–15 years just making profit and growing their business. Financing for them started out with traditional finance, possibly some “patient capital” from private equity and later on possibly from the stock market. Nothing happens fast. They were never going to be a classic scale-up. They started life as a Young Legend and became a Legend. But they were never a startup.
CIC: If you are more focused on your idea than you are on generating business value and return for your investors, then you are most likely a Community Interest Company or a Charity. Investors understand that you want to do good in the world and that is great. Investors make charitable donations to companies like yours. But they don’t put in £500,000 to pay your salary. CICs are an important corporate structure in the UK, but they are not startups.
Now, go back and look at your business. Take a hard honest look and check your business against each of the requirements and then ask the question:
Am I a startup?
Here’s the checklist:
- A $100M+ Opportunity — that actually applies to you
- Hockey Stick Growth Forecast — that you can actually believe
- A plan to get the investor their investment back — bigger
- Serious focus on the business -not just the product
If the answer is no, figure out what type of company you are and go for the right type of funding. You’ll save yourself (and the investors) a huge amount of headache and wasted time.
Small business, small enterprise, young legend, charity — they are all great ways for entrepreneurs to get out and make their mark in the world.
