This is a journey through those decisions that should never have been made, due to the lack or excess of audacity, the lack of control over spending or the effort to increase the client portfolio without worrying about loyalty. The investor’s analysis is demanding, insightful and systematic. Your enthusiasm, a groundbreaking idea and a brilliant presentation are not enough to get to that smart money, an intelligent investment that adds value and experience to your project.
In their offices hundreds of companies are analyzed every year, and only a few will achieve their support. Five protagonists of the Spanish investment system reveal those errors that lead to the final dismissal of a startup for which they had been interested. At times, it is wounded in such basic issues as the lack of leadership or innovation and, in others, in strategic points how to underestimate the competition or offer a shareholding portfolio in which the presence of the entrepreneur is residual.
An analysis enriched by the different vision of each of the experts. The one of the accelerators, sometimes the first contact with the entrepreneurial ecosystem, differs from that of the business angel or the even more demanding comment of the risk capital, next to which the project acquires a definitive maturity. We go into matter, there is much to tell.
1. NOT BEING TRAINED BEFORE STARTING
The previous training is “one of the bases on which a good project is based”. It is the first recommendation of Javier Jiménez, general director of Lanzadera, the great Valencian accelerator driven by Juan Roig, the founder of Mercadona.
2. ENTREPRENEURS WITHOUT THE PROFILE OF ENTREPRENEURS
“I do not mean that they do not have a beard and a Batman shirt,” laughs the general manager of Lanzadera, “but some of those who join the fashion of entrepreneurship do not have the capacity to take the risk, be passionate with the idea, make decisions or see opportunities where others see problems. It’s a matter of leadership, in a company someone should have the last word, and also command deserving the trust of others. “
José del Barrio, founding partner of Samaipata Ventures, his most personal project after the success of La Nevera Roja, insists that “the founders, whether due to lack of experience or specific skills, are not always the best suited to carry the project finished. We believe that there are sectors in which it is essential to have previous experience in the industry and, in addition, having created a company before, even if it is from another sector, involves apprenticeships in management and team building.”
3. THE COMPANY IS NOT A GANG OF COLLEAGUES
Jimenez is so graphic:
“We understand that at first the easiest thing is to get together with the people closest to you, but that does not mean that the second on board always has to be the best friend, nor your partner the community manager. The CEO must be the best, even if he is not the one who had the initial idea.”
4. THE TEAM DOES NOT COST
The team is another of the most analyzed elements before investing in a project. “There has to be a good balance between the most technological part and the business,” says Jesús Monleón, co-founder of SeedRocket, which in 2008 opened the way for Spanish accelerators: “If I detect that there are rough edges between them, I back out ” Another aspect that considers fundamental is that there is a partnership agreement: “The rules of the game should be clear.”
5. FALL IN LOVE IN EXCESS OF THE IDEA
For Lanzadera, the number one enemy of the entrepreneur: “When you are very much in love, you do not want to listen to anyone and nobody contributes anything to you,” Jiménez explains. Monleón agrees on the importance of enriching the idea with the contributions of others:
“When you are a bighead who does not take care of anything or anyone, you can not invest. It is one of the most common examples of lack of empathy between the investor and the entrepreneur, all projects must pivot little by little to adjust to the reality of the market.”
6. THE ACTIONS ARE NOT A PIPE BAG
The distribution of shares must be proportional to the commitment of each member and open to the participation of those who fall in love with the project. “It is a priority,” says Monleón, “there are times when many shares have been sold to an investor who does not contribute anything from home. Sometimes it is a quick solution problem, just explain that if you do not sell, the project will not move forward. Nobody invests in a company in which the actions of the leader are testimonials.
7. HIGH EXECUTIVE WAGES
Sometimes, these startups are driven by entrepreneurs who come from the investment bank or the big company and who are not willing to give up their important salaries or during the months of consolidation. “You have to know that there are very few startups that can start with payrolls of 100,000 euros,” warns Monleón. Álvarez de Toledo provides a solution: “There are many entrepreneurs who accept to charge a smaller amount for a while, but each year they convert the difference into shares. In general, it seems a good measure “.
8. MAKE THE MILK ACCOUNTS
“Aspire to non-feasible market percentages, demotivates the team and generates distrust in the investor”, explains Jiménez, who advises to be “realistic with the accounts”. Álvarez de Toledo sums it up in two concepts:
“Credible ambition. For us it is increasingly important because it shows that the entrepreneur has his feet on the ground. It is crucial that the business plan is well developed, both in the strategy and in its figures.”
9. OVERVALUE THE MARKETING STRATEGY
No one doubts the strategic importance of online marketing, “but without effective commercial work it is very difficult for the project to grow with strength”, defends Majadas.
“Both actions must be well balanced and, at times, there is an excess of confidence in the effects of marketing.”
10. Billing is not synonymous with charging
“What makes you move forward is the cash at the end of the day, not the sales you could have made.” In the opinion of Javier Jiménez, this very basic reality is not always assimilated by the entrepreneur.
11. Lack of ambition: revolutionizing the sector
“We bet on founders who have an authentic vision that involves revolutionizing a sector from top to bottom,” says José del Barrio: “Vision is what you want to be in the future – what do you want to be when you grow up? – and has nothing to do with the mission or the go to market, which are just the steps to follow to build that vision of the future. In many cases, the entrepreneur does not go beyond copying a model or bringing a non-digital product or service to the digital world, maintaining the same status quo. ” In his opinion, the basic thing is “to build an own vision on the market and a clear launch strategy, testing different acquisition channels”.
12. THINK THAT THE STANDARD TECHNOLOGY DOES NOT MOLL
“Do not spend money on things that already exist,” Jiménez sums up. A good example is that of a startup that invests a good amount of its initial budget in the development of a CMS with the same benefits as a $ 100 WordPress template.
13. INFLATE THE TEMPLATE
This is another point with more diverse opinions. Some people warn of the danger of inflating the staff, and its costs, and who criticizes lack of ambition in attracting talent. “When the money arrives, the first thing that is done is to hire, and in addition it is done more by personal affinity than by professional capacity”, defends Jiménez. For Del Barrio, “the lack of resources is not always an excuse to not attract good talent. You can count on great professionals inviting them to be co-founders or share shareholders. Recruitment is the biggest challenge, and we believe that we must attract with the vision of the company, allocating a pool of shares to this end, and also using resources from the funding rounds to create that great team. “
14. SUBESTIMARAL COMPETITOR
Monleón points out:
“What do you have about the main competitor? If you are a social network you must provide a differential value to Facebook.” Factor that do not value in their importance some entrepreneurs, “they think so good that everyone will go to your website, but you have to know how much it will cost to capture that customer or web traffic.”
Reflection with which Del Barrio coincides, which also means the importance of learning from the competition:
“In most cases, the entrepreneur is skeptical about this possibility, and we believe that it is a big mistake. There have always been hundreds of entrepreneurs who have tried to launch the same model before, are in it, or will launch it tomorrow. And it is essential to learn from them and apply those lessons to the daily improvement of the business.”
15. EXCESSIVE DEPENDENCY OF CEO SALES
“When sales depend a lot on the CEO, a limit to scalability is being put in place,” says Álvarez de Toledo. In his opinion, it is important that there is capacity to generate a sales team, “but there are entrepreneurs who have problems managing large teams, something we see in B2B projects. However, it is an easy problem to solve by putting someone with experience, although in Spain there are not many professionals who have participated in companies with international sales “.
16. CAPTURE IS DIFFICULT, RETAIN MORE
On this occasion, Jiménez talks about the importance of the project developing its capabilities and retention policies: “Team, sales and customer.” Del Barrio puts at the same level of effort both the recruitment of that client and its recurrence:
“We need users to return to our platform on a recurring basis and, ideally, that they consume more and more because they are offered a better experience and product. . Many founders focus on acquisition, but do not measure recurrence through cohorts, nor do they care to ensure that acquired users stay. You have to give a great customer service.”
17. BELIEVE THAT ‘BUSINESS ANGEL’ AND ‘VENTURE CAPITAL’ IS THE SAME
“The first mistake is to think that your company needs money from a venture capital,” says Álvarez de Toledo: “You must find out how it works – because it is not the same as a business angel – you need companies to grow quickly in a short time and that it requires a risk on the part of the project. ” In the case of this venture capital firm, the investment must be multiplied by ten in a period of 5 to 7 years: “And all the companies that we analyze are because we think they have that potential”.
18. THINK MORE IN FINANCING ROUNDS THAN IN BUSINESS
Victoria Majadas, president of the business angels association Big Ban, highlights a very important issue: “The startup has a business mission and in parallel it spends a lot of time raising financing rounds. Sometimes I see that this effort is not well balanced, it is important to raise capital but you can not lose the focus of business “. His proposal is to put specialized personnel at the forefront of this mission and the CEO to focus on doing business. In addition, he considers it very important not to get obsessed with the hurry, “speed is important and that is partly achieved with funding rounds, but we also have to give time to organic growth, which helps to establish the business model”.
19. WORKING A LOT FOR THE POWERPOINT AND LITTLE FOR THE EXCEL
“And to the third question, the investor catches them,” warns Jimenez, “you have to think more about the client and the Excel sheet than the investor and the PowerPoint.” Summary of a very common opinion, and that virtuosity in presentations, in many cases, rather than add, subtract.
20. ALSO ANALYZE THE INVESTOR
Once again, the president of the Big Ban association puts us in a position, “the business angel analyzes the project very well, but the entrepreneur does not always think of the investor”. Is he the right person? What is going to take the project away from money? What do you ask for in return? These are questions that must be answered before making a decision: “In the same way that the investor anticipates his departure, the entrepreneur must measure how his input will affect the evolution of the project.”
21. THE LEADER DOES NOT AGREE
Investors put special interest in knowing the project leader in depth. For this, it is common to hold different meetings, from the most formal ones in the office to more relaxed meals and attendance at sectorial events, the objective is to see how the entrepreneur develops. “I try to talk a lot with him,” explains Jesús Monleón, “because they always sell you the cool part of the project, but I want to know what the challenge is. There are times, in addition, you see inconsistencies in his speech, and this business is based on trust. “
22. LOSE THE CRITERIA OF AUSTERITY
When the financing round concludes, a significant amount of money is injected into the project “and it is easy to fall into the temptation to quickly change headquarters, and charge fixed costs,” Majadas says:
“Control of spending is always fundamental, and more when it starts. I like teams that have internalized that the austerity criteria are forever. ” In reference to this oversizing of spending, and in a similar speech, Álvarez de Toledo reminds entrepreneurs that “the money of venture capital is to grow, not to survive. Sometimes they move the feeling of thinking that money is infinite but when you bet on them it is to make the company bigger.”
23. INSUFFICIENT ‘REPORTING’
“After that hard search for that smart money, the entrepreneur does not benefit from the value that a business angel can provide,” says Majadas. “Although, sometimes, our percentage is small, we contribute much more than we think, but to do it we need a fluid communication”. In order not to fall into this isolation, he proposes to stipulate concrete measures in the partner pact: “It is not to drown, but to ensure that information in an organized and periodic way “. De Toledo stresses that “in the councils there is more talk about the good than the bad, and it is very important that there is transparency. We like to work together with the business plan, it is a way to believe even more in it, so, in case it does not reach the expected result, confidence is not undermined. “
24. LACK OF PERMANENCE COMMITMENT
Álvarez de Toledo points out, “it is invested in a team and for the investor it is a priority for entrepreneurs to sign a permanency clause for a certain time in the partners’ agreement”. In JME it is three years, penalizing its exit if it occurs before, and it is recognized that sometimes it is a conflictive point of negotiation.
25. DEFICIENCIES IN THE TECHNOLOGY OR THE PRODUCT
“We invest in technology companies and that bet to revolutionize the user experience, so it is essential that technology and the product are an essential part of business development from day one.” A requirement that, according to the founder of Samaipata, leads them to analyze also “the vision that the founders have for attracting talent. We understand that they have to be aware of that need and that it must be part of their business plan.”