Friday 30 September 2016

Startup advice: how to know a likely investor from an unlikely one

Dylan Collins

Published 25/06/2015 | 02:30

When you're assessing investors or customers, making a brutally honest appraisal of probability is essential. Picture posed
When you're assessing investors or customers, making a brutally honest appraisal of probability is essential. Picture posed

My experience of the Irish education system has been somewhat mixed. My second-level maths and history teachers influenced my thinking on the world more than they could know.

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History taught me about the ill wisdom of fighting a war on two fronts and, when visiting Russia at any time of the year, to pack warmly. Maths taught me to sit beside the smartest kid in the class, which wasn't strictly the educational goal but has stood me pretty well regardless.

My university corporate finance lecturer never quite succeeded in explaining Black-Scholes to me but he did manage to emphasise the (then) profitability of Nintendo which set certain other games-related wheels into motion.

Finally, a brief foray into economics taught me the equally valuable lesson that I'd no interest whatsoever in guns, butter or economics.

While today it seems as if a vast amount of my education could probably be substituted by one of the many online learning platforms (or even YouTube), there are two subjects which I would dearly loved to have received proper education on: presentations and funnels. I want to talk a little about the latter. Understanding the science of funnel management is something which can help you and your sanity survive long processes like investment rounds or enterprise sales cycles.

The gist of funnel management is that, assuming you have a commercially competent offering, you'll convert a percentage of your prospects into actual sales. So the key is to load up your funnel with the right kind of prospects, an identical exercise regardless of whether you're sourcing customers or investors.

To paraphrase Charlie Sloth, "men lie, women lie, but funnels force you to be honest". A lot of startups will come in saying 'VC firm X is investing'. But an associate taking a meeting is not an indication of anything.

When you're assessing investors or customers, making a brutally honest appraisal of probability is essential. 'Where are we in your decision-making?' is one of the most critical questions you can ask.

If your product is competent, you will eventually convert. As you start to layer more and more of these conversations, you'll begin to realise the value of a quick 'no'.

Identifying the people who won't invest or buy are important because you can then start to assign probabilities to those that might.

Understanding where the probabilities are higher is the key to almost everything in life: it tells you where you should double your efforts and be mercilessly prepared.

For those who don't play cards, it suddenly makes poker comprehensible. It sounds almost childishly obvious but you'd be surprised how many people don't think this way.

If you're ever going into a meeting where you know the probability of conversion is higher than normal, there is absolutely no stone you should leave unturned.

My checklist for high probability investor meetings goes something like this:

l Look at every portfolio company they've invested in (including exits)

l Speak with a few founders/CEOs from their investee companies

l Prepare an FAQ for every possible question they could ask (this should be standard, anyway)

l If available, listen to (or watch) them online or read their posts (at a minimum)

l Be clear on the one thing which would blow them away in a meeting

l Have some quick references ready

My checklist for a high probability customer meeting is similar but different:

l Know the career history of key players in the room and their history with their current company

l Understand the history of previous solutions they've tried or used

l Prepare an FAQ for every possible question they could ask (again, this should be standard)

l Be armed with two or three case studies and a comparison matrix

l Have some quick references ready

l Be clear on the one thing which would blow them away in a meeting

I have two rules for good funnel management:

l First, your universe of prospects has got to be large enough for a conversion factor to emerge.

l Second, even if you think you've got your final investors or you've hit your sales target, always be loading the top of your funnel anyway. There are various apocryphal conversion ratios (like 20 prospects to 6 serious conversations to 2 closed deals) but they're simply that and nothing more.

Life has always been a probability game. Find where the probabilities are lowest and highest and you'll start to level up.

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