Thinking Like Capital, Part 2: An Investor Checklist and My Additions

#ThinkingLikeCapital 2 The author lists several factors that investors care about most. 1. The entrepreneur is not sufficiently candid, is always pursuing a private agenda, and tries to make money off investors. This greatly reduces investors’ interest. Capital comes in to partner with you and build something. You cannot treat investors as someone to whom you can offload the problem, much less as a parent you can exploit. (Robin: “Do not look at things only from your own perspective. You should think about the investment from the capital provider’s perspective as well. You should be looking for a partner to create a win-win outcome, rather than hoping someone will take the bait.”) 2. The venture has no route or timetable to profitability. Every venture should aim to make money. Investors can tolerate your not making money for now, and even substantial losses, but cannot tolerate the absence of any prospect of making money. They certainly will not invest in a venture for which even a logical case for profitability cannot be made. Entrepreneurs therefore need to explain clearly how they will make money in the future. That at least shows they are thinking straight. (Robin: “Think clearly about whether the business model itself can make money, and whether it can make money under intense competition. Take the American ride-hailing platforms: if only Uber and Lyft are left, yet they still cannot make money, is there a problem with the business model? Or is this simply what intense competition looks like?”) 3. There is no innovative sales model. Put plainly, where do your customers come from? Investors are not interested in traditional methods that bring in customers one at a time. They may be interested in a venture with built-in traffic, where new users arrive even while you sleep. Once an ecosystem forms, users grow organically. Over time, customer acquisition costs can stay steady or even fall. No competitor, however strong, can get in. Take WeChat: even after Alibaba launched Laiwang and NetEase launched Yixin, those competitors were effectively defeated before the battle began. This kind of community model creates enormous barriers to entry. (Robin: “What are the barriers to entry and the moat in your business model? How will you achieve a monopoly?”) 4. You do not know your key performance indicators. Entrepreneurs must know what they should focus on most: acquiring new users or retaining them, technology or marketing. If you tell investors that everything is important, you are done. It reveals that your thinking is unclear. Good entrepreneurs should know exactly what drives their company. (Robin: “Smart business operators can identify the key numbers—the so-called magic numbers—of their business. Every part of the operation is designed to achieve those numbers.”) 5. The founding team is unbalanced. A strong founding team should have clearly divided responsibilities: someone for technology, someone for sales, someone for marketing, and someone for financing. If everyone on the team is a technical specialist, investors will not invest either. Your product and sales may have serious problems. If the whole team consists of salespeople, the company is unlikely to have much technological substance. 6. The funding runway is short. Once fundraising begins, it needs to continue round after round. A round generally provides enough funding for 12 to 24 months. Too short, and the company cannot concentrate on refining the business; too long, and the risk is excessive. Entrepreneurs should therefore appeal to investors’ preferences by explaining how the money will support 12 to 24 months of operations and deliver growth. Do not say, “I only need this one round, and will never need more.” That makes investors uneasy too. (Robin: “Plenty of teams say this is their final round before an IPO. Most experienced VCs simply take that with a grain of salt.”) 7. There is no patent barrier—in other words, no technological advantage. Anyone could do it, and once a giant steps in, you are finished. Entrepreneurs have to address this concern: why must you be the one to pursue this venture? Where is your advantage? 8. There is no foresight, or the ambition is too limited. This is a very common problem. A wutong tree that cannot grow a hundredfold will not attract a golden phoenix. (Robin: “Is the ultimate ceiling for what you are doing very low? If it is, you will soon hit a bottleneck, and VCs probably will not be interested.”) 9. You do not know how to analyze competitors’ strengths. Most entrepreneurs can identify only competitors’ weaknesses and fail to see their strengths. That makes investors worry that the entrepreneurs are blindly optimistic. The right approach is to analyze objectively, assess fairly, and anticipate more of the difficulties. That will make the journey smoother. ------- For early-stage venture capital investors, you do not need to explain too many details of the venture, because in their minds the venture itself is not important. What they are really investing in is the founding team. Even a great company can end up with a business very different from its early one. Alibaba initially ran a B2B yellow-pages business; Tencent was originally an internet pager; Baidu was an outsourcing company that solved search problems for major portals. These were in some cases completely different from their eventual core businesses. VCs understand this very well. However clearly you plan your business, things will change. What they are really investing in is your adaptability and breadth of vision. When seeking investment, demonstrate the ability to adapt and to command the situation, rather than merely insisting on how wonderful your business is. The more obsessively someone clings to a single business, the more reluctant VCs are to invest. (For reference only. Personally, I still believe the venture itself, market demand, and product-market validation are very important! —Robin) ---- #老齊的讀書圈 #LaoQisReadingCircle