This is the second in a three-part series on how I make investing decisions for follow-on investments. The first article described how I evaluate the entrepreneur. This second article describes how I think about market timing. The third article analyzes sustainability.
When the entrepreneur is asking for more money, I want to remember the reason I decided to do the deal in the first place. Then I compare my initial reasoning on the deal to where they are now. The initial investment is all about vision and promises. The second investment is all about performance and results.
Now Is the Time
I was told a long time ago, a great team with poor market timing will lose. A mediocre team with great market timing will always succeed. I have found this to be true. Markets that are actively buying make companies great. And great companies are wonderful investments.
Flashpoint is a Georgia Tech accelerator here in town. It is founded and led by Merrick Furst. He is a unique talent who radically pursues one question: What does a company need to do to get to a point where the prospect cannot not buy what it is selling? (I know this is a double negative, but that’s what Merrick asks.)
When Intuitive Is Not Obvious
Merrick has done a study on early-stage companies. The companies which were successful all had one thing in common. They entered markets which were buying what the company was selling. I know this sounds obvious. But in traditional angel investing, this is the heart of the bet. Will the dogs eat the dog food? If the startup gets this timing wrong, they are burning money. Get it right, and they are geniuses.
Merrick dedicates his life to helping startups get this right before they begin burning money. And he has been successful in this endeavor. Not every time, but he’s improved the odds of success dramatically.
So when I am asked to invest in the follow-on round, timing plays big in my decision criteria. Here is what I ask myself.
- Is the market buying? Are the dogs eating the dog food?
- Are customers paying money for the product?
- Is the market confused about whether to spend money on this product?
- Is the company getting the price they expected for the product?
- Does the company have a healthy sales pipeline? Inquiries up?
- What is the velocity of sales?
- How are the competitors fairing?
- Are there new entrants into the market?
- Are channel partners beginning to inquire?
- Are the initial customers using the product?
- Does the product fulfill its sales promises?
- What is the churn rate for customers? How important is the product?
- What are the trade press/industry blogs saying about this company, if anything?
Over the years, I’ve learned that the answers to timing questions are critical. If I ignore them, it is at my peril.
In the last article, I told how to determine if the entrepreneur and his people can build value. Are they capable, experienced, and the right people to build this company? With the people box checked, I must be confident the market is ready to buy. Miss this one, and all the talent in the world can’t fix it.
Now the follow-on investment is dependent on one more variable, sustainability. Every business must eventually make a profit. Profits keep businesses in business. That’s what I’ll talk about next in deciding whether or not to make a follow-on investment.