Three years ago, I founded a tech startup investment firm to channel early stage capital toward quick-thinking entrepreneurs with a drive to succeed financially.
My mantra for investing: “Technology is cool — but generating revenue is even cooler.”
There are four considerations I research before deciding to fund a company: the business idea, the founder, the intelligence of the players, and the sustainability of a revenue channel.
Here’s a primer for new investors on each of those considerations and how you can use them to make smarter decisions and — with a little luck — more profitable investments.
To me, the most important item to examine is the business idea itself. Simply put, every startup has to be a business. I have to be convinced this is a viable concept that can become a profitable business.
There are many of well-known founders with lengthy track records that attract investment regardless of the strength — or lack of strength — of their idea. I view it as a sign of arrogance that these entrepreneurs would seek funding with a lukewarm business idea.
If you do not have a solid startup business idea with a clear way to quickly generate revenue, you essentially have nothing to get off the ground.
Who is the founder?
My ideal founder not only thinks everything through but is also what I like to call a quick thinker.
Being a quick thinker doesn’t simply mean intelligence. It’s the ability to come up with solutions and to do so quickly. Having a successful startup requires fast execution, as well as fast reaction to unplanned changes, good and bad. Quick thinkers have a strong advantage.
I do not invest in what I call silver-spoon entrepreneurs. This is my term for an entrepreneur who is starting a company not because they need to but because they have a lot of money for one reason or another and they start companies simply because they can.
All of the founders I have invested in had a lot to lose by starting a company. This makes them hungry, which contributes to their drive to make the business a success. That’s not to say wealthy people don’t do well, but I need to see drive and dedication and the right motivation — no hobbyists for me.
Most people I have invested in have the same mentality, and I have heard it repeated by strong entrepreneurs: “If I can’t come up with an answer/idea/marketing plan/etc. within 30 minutes, it’s not going to come to me.”
Put simply: A startup founder should spend less time thinking and more time doing.
Great founders also have a killer instinct. Although it’s hard to describe what I’m looking for, you can see it in their eyes. They have a will to win, and they won’t accept no for an answer.
Finally, I only invest in founders that have the ability to manage all aspects of the business. Many startups I review are created by just one or two people who do not have the basic skills needed to run a small business. To run a company, you need to possess a basic understanding of accounting, a clear idea of the legal requirements of their market, a grasp of basic marketing and strong project management skills.
In these cases, important things slip through the cracks or founders on tight budgets are forced to overpay for services because they don’t bring the necessary skill to the table.
I only invest in individuals that are smarter than me — and substantially so — in their chosen business. If I don’t come away feeling like I would be able to learn something from them about their company and industry, I don’t believe they will be worth of my investment.
There is no point in investing in a company that cannot sustain itself financially by producing a great product and attracting customers. A business does not need to be revolutionary or even be an industry game-changer, but it does need to have a clear path to steady revenue.
I start with an idea, an objective like subscription, SaaS, or e-commerce business model. I then focus on how this business concept will make money and figure out every step to get there — and then I do it again, in reverse. I keep going back and forth through the thought process until the product in my head does not change. I would never say to myself, “We will figure out revenue later,” and I would never invest in a company or idea with that approach.
Not every business idea will succeed, and some companies, no matter how good they look, will fail. However, by examining these key factors up front, you will have a clearer understanding of your motivation for what to expect when investing what to expect and an idea of what lies ahead.
Dan Soha is president of Five Mill Ventures, an early-stage venture capital fund and incubator based in San Francisco. The firm’s portfolio companies include contact management service Full Contact and green consumer-facing startup SimpleEnergy.