Jun 19 2007
Company Self-Assessment
For this note, I want to focus on whether or not your company can establish its credibility or “expertise” in the eyes of the investor (putting aside the issue of whether or not you have a good business idea). In later notes, we’ll deal with how investors think about “good” and “bad” businesses.
As your company evolves, it will make sense to approach different kinds of investors and those investors will be looking for different things in terms of your company’s credibility. The table below presents a generalization about which types of investors invest at different stages in a company’s lifecycle. The final column indicates what kinds of initial questions they will ask and judgments they will make about credibility when deciding whether or not to proceed with discussions.
|
Stage of Company |
Type of Investor |
Example Credibility Tests |
|
Concept only |
Friends & Family |
Do I trust this person? Do I believe they have a good idea? |
|
Working Product / No Revenue |
Angel Investors |
How unique is the product and how easy to imitate? How experienced and credible is the technology person / team? How believable are the plans to attract customers? How experienced and credible is the business person leading the sales & marketing effort? |
|
Working Product / Initial Revenues |
VC Investors |
Angel criteria, plus: How complete is the team (are all skills covered) and how well do they get along? How realistic is the strategic and operating plan to build a business? What do initial customers think of the product? What do potential customers think of the product? |
I’ve found it helpful to ask entrepreneurs to think about trying to score (and not lose) “credibility points” as they progress as a team and a company. One very useful exercise is to ask a trusted outsider to read your pitch material or listen to your presentation and give you honest feedback about what things specifically gained a “credibility point” and what things lost a “credibility point”.
Following is an example of what a practice score-sheet might look like for a company that seeks to present their company, a new search engine, to the VC community:
Positive Credibility “Points”:
- The Founder / CEO was lead architect and spent two years at Google. He is considered a world expert on search engine architecture problems and solutions
- The technology works well
- Initial customers seem to like the search engine and return to do more searches
Negative Credibility Points
- No-one on the team has experience driving sales & marketing. The CEO makes strong claims about how fast the company will grow but he has never done sales & marketing and does not have good answers when asked about customer acquisition strategies.
- The CEO claims they will grow to over $100mm in sales in 2 years – even if they do everything right this sounds really naïve!
- Even in cases when the CEO clearly doesn’t know the right answer, he gives a firm answer rather than admitting he doesn’t know.
In my experience, despite the impressive positive credibility points in the left hand column, almost all investors would probably turn down a second meeting with this group because of the credibility problems in the second column. The CEO feels like a person who “doesn’t know what he doesn’t know” and that is a very dangerous person to invest in. Given the strong background of the founder and the initial traction of the product, this company should be a good candidate for funding. This CEO should spend time understanding where his weak spots are and seeking out ways to improve.
