Jamie Pride, who authored the book Unicorn tears: Why start-ups fail and how to avoid it, previously told My Business that many entrepreneurs and business leaders chase capital for the wrong reasons, and that money is rarely if ever the solution to a problem.
Yet even those who do legitimately need funds are setting themselves up for failure.
No value, no capital
He said that first and foremost, venture capitalists want to see that you have what he describes as “the value hypothesis”.
“[Do] you have a value proposition that customers are signalling that they are interested in; you’ve customers who are buying your product; you’ve got some sense of product market fit and that adding capital will allow you to grow … and scale,” said Mr Pride.
It is the same with private equity funds looking to invest in businesses with demonstrated value and ability to scale.
What investors look for most
Contrary to what many entrepreneurs believe, Mr Pride said the slide deck is not the most important thing he looks for when determining whether to invest in a business.
“A lot of people just come in and spray their pitch and don’t connect with you,” he said.
Instead, Mr Pride said that venture capitalists are more likely to invest in people than in ideas, because it is the people who make ideas come to life.
“For me first and foremost it’s the way the entrepreneur thinks. I can pretty easily connect with an entrepreneur who you know is thinking about the problem in an analytical way,” he explained.
“What’s impressive is an entrepreneur who comes in and says ‘look, this is the problem we’re solving, this is who we are solving it for, this is how we are going to solve it, this is what makes us different, these are the experiments we are going to run to prove our hypothesis is right, here are the risks, here is my experience, here is the team’.
“Rather than going “here’s the big hockey chart, it’s going to be a $400 billion market in four years, it’s got crypto, it’s got blockchain, it’s got AI – whatever buzzword, buzzword, buzzword’.”
Standing out from the pack
As such, Mr Pride suggests the businesses most likely to be successful in their quest for funds are the ones who are invested enough to know all the key points by heart.
“The 10 per cent of entrepreneurs who are world class could pitch to you with no slides at all, and have deeply thought about the problem, have thought about the risks and the challenges, they’ve thought about how customers are solving the problem today,” he said.
“Even better, they may have data from customers, customer interviews; they may have left the building and done customer interviews, they’ve done experiments, they’ve got video of customers using their products — those are the top 1 per cent of founders, who have actually gone out and collected real data.”
Should you disclose past failures?
Pitching for money is daunting, and it’s only natural — as in a job interview — to want to present your best side. But should you admit to past failures and mistakes as part of your journey to getting to your current point in the business?
“Absolutely. People who are willing to be that vulnerable and admit ‘we tried subscription pricing but that didn’t work, and now we’re trying pricing at this point and here’s why [will do better]’,” Mr Pride said.
“It’s a scientific method. People who can go ‘this is what we wanted to prove, these are the experiments we ran, and these are the ones that worked and these are the ones that didn’t work, this is why, and these are the decisions we made based on those experiments.
“What I’m looking for is an entrepreneur who is self-aware enough to be coachable, who is not going to have an ego that doesn’t let them admit failure. Because it’s not their personal failure, it’s just a business failure — it’s just a period of experiment.”
If anything, Mr Pride said that admitting to past failures or mistakes can help endear you to an investor.
“A lot of entrepreneurs have this super founder myth where they feel they have to be right all of the time, and they’re just not prepared to be vulnerable enough around some of those failures,” he said.
“I’m very, very pleased when see someone come in and pitch around what they’ve tried and what has and hasn’t worked; and even more pleased about a founder who has been in another start-up before.”
He concluded by saying that “second-time and third-time founders have a higher rate of getting funded, and the reason for that is that they’ve learnt from their mistakes, they’ve got the scars … you know that they know what they’re getting themselves into.”