What Top Investors Look for in Early Stage Startups
By: Doris Dong
Tags: Startmate, Tips, Early Stage, Insights, Investors

Q: How did you get into startup space? What would you change?

Mahesh: I wish I had started earlier. I had no idea about startups 10 years ago, and only knew there were big tech businesses like Google. And I thought they were cool but I didn’t understand ‘startups’. Social networks like MySpace, Facebook etc captured the imagination of my generation. These companies who were growing so fast seemed to have such an impact on the world. It seemed so exciting, there was so much learning going on etc.

In my MBA class an entrepreneur presented the space to us and it was the first time it felt a bit more accessible. It planted the seed. Then growing frustration with “what am I really achieving” got to me and I decided to have a crack at a startup. For the longest time though — I had imposter syndrome as an entrepreneur.

I would have gotten into it sooner. The Australian market was just beginning to grow. If I had been more aware, I should have hustled to try to get into Atlassian (pretty much the only proper growth startup that was making waves back then) but things worked out :)

Dan: I got interested in startups around 2007 playing around with a few business ideas. We ended up launching GradConnection based off experiences on the Westpac NZ Graduate Program and seeing a gap in the market in how companies attracted students to apply to their entry level programs.

When we first started out, there wasn’t much of a startup scene in Australia at all apart from a weekly drinks at a hotel happy hour once a week and not many avenues at all for funding which is way different to the multitude of accelerators and funding options available today which is a massive evolution of the startup eco-system.

Q: What stage do you usually invest in and why?

Mahesh: Really early stage. To me, passing on my experience and supporting the founders is really important. I realise now there is a difference between an investor and a mentor. An investor’s job is to choose wisely and deliver ROI (return on investment) for themselves, LPs (limited partners) etc. On the other hand, a mentor’s job is to guide a startup through critical decision making, pointing out gaps, giving frameworks to think through a problem, sharing their experiences/resources and even more. Investors may likely deliver even more value for themselves and their companies if they have actually had their own startup and been an operator, as then they are in a good position to mentor. It is likely that the best investors are mentors.

Dan: I’ve been involved in investing in venture capital funds since about 2012 but this has been completely passive in terms of me selecting which companies to invest in. I’ve been getting involved in direct Angel Investing since about early 2020 so just under 18 months at this stage. When making direct investments into startups I’m generally focused on the Pre-Seed and Seed rounds

Q: What do you look for in early stage startups?

Mahesh: Really simple — a strong connection between a founder and a problem, product market fit (or love preferably), traction and ambition. Basically a minimum viable business going for crazy scale. These are the non-negotiables for me.

Dan: The key things I look for are:

Founding Team: do they have a good background in the problem domain and the right skills to run the company?

Business Problem Domain: is there a real business in the space they are choosing to work in?

Progress made in acquiring customers, revenue, traction off limited to no funding or resources. If a startup can get any sort of traction in their problem domain without much cash to spend, it’s a good sign they will be able to multiply their efforts substantially when they receive funding

Clear scalable uplift that can be achieved with the fund raise with a big addressable market. Key thing is to have $X spent will return $Y in revenue or some other key business metric.

Q: What are the biggest mistakes founders make?

Mahesh: Not getting product market fit. Nothing matters without that. That is the first step and you can get it with really low tech fidelity. You need a bunch of customers saying I love how your solution solves my problem. Nothing else matters early on. Not a tech cofounder, not non-tech cofounder, not advisers.

You have to understand the problem you are solving really deeply. What is it in acute detail? You should be able to write a research paper on it. If you don’t understand the problem really deeply (through customer interviews, research and insights) — it is going to be really hard to accelerate fwd.

Dan: Not ‘expectation setting’ early on amongst founders. This is hard to get right early as things are very dynamic and always changing however if you end up having a really imbalanced workload and responsibilities amongst founders it will cause issues later

Also, building products no one wants. Many startups focus on building something before going out to heavily engage with their future customers meaning a lot of time and resources get wasted on building things that never get used due to no product market fit.

Q: What do you think makes a great founder?

Mahesh:

Deep connection to a problem, grit (there is a book on this) — basically capacity to get off the mat. Curiously, capacity to learn things and also a confidence that you can work through problems. Strong communication (story telling) skills also go a long way. Finally “I want to make an impact” at the core of it all.

Dan:

A personal connection to the problem the business is solving Resilience — things are not going to go to plan more often than not, so you have to be able to deal with some major setbacks, change direction and keep going

Q: What mistakes have you made thus far (startup/investing related) and what have you learned?

Mahesh: The biggest mistake I have made is to be distracted by vanity metrics and the story telling of founders (I was that person too!). I wish I had pushed for evidence and signalling of problems and customer validation more. I should have insisted more often for evidence around problem validation and also validation that the solution is working.

Dan: In a funded scenario, the startup needs to be thinking 1–2 funding rounds ahead to make sure that their initial round of funding will produce uplift in the business to support and simplify their future fund-raising rounds as that can be a real momentum killer if your next round doesn’t go smoothly.

Q: What are some indicators that an early stage startup is heading in the right direction?

Mahesh: Revenue metrics — as Paul Graham says, the key metrics are just growing. If not, founders are talking about how to do this and asking the right questions etc. Also, if the team they are bringing together has a good startup/tech history — that is a good sign.

If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly. — Paul Graham

Dan: Having a set of customers/users that would be very unhappy if the product or service didn’t exist anymore and being able to grow this set of customers according to their forecasts is a pretty good indicator you’re heading in the right direction

Q: What are the mistakes you see other investors make?

Mahesh: In my opinion it is indexing for the positive vibes that their interaction has had with a founder. We are all biased in my opinion, acknowledging that and trying to make as few subjective decisions (or minimum, acknowledge what are the things that are subjective that make you like them). Also when an investor wears a mentor hat as well but they don’t actually have startup operator experience (or have not had the chance to pick it up) — this can be really dangerous.

Dan: The main mistake I’ve seen is that some investors will blindly follow higher profile investors or celebrity investors into deals without doing their own due diligence (DD). Another mistake at the early/angel stage is over doing it on the DD as most of the time the company won’t have reliable data/forecasts to provide you that you can necessarily put much weight into as well as taking up a large amount of the founding teams time for DD questions over what ends up being a small cheque from an individual investor

Q: Which entrepreneurs do you admire and why?

Mahesh: Mel and Cliff from Canva are fantastic entrepreneurs. I think Jack Ma (refer to video below) has also achieved unreal things. I like the Afterpay story. I also really admire every entrepreneur that is problem and customer focussed, whether that be those I just mentioned or a local cafe owner. Every person/team who has a go and one of (if not the highest) their biggest priorities is to solve a customer problem — yeah that’s great. In my opinion, prioritisation and focus is one of the key things for a vibrant powerful economy and society.

Crocodile in the Yangtze Trailer depicting Jack Ma’s story

Dan:

Rosemary — Romain Bonjean: Romain is an execution machine in the e-health sector for his current venture Rosemary Health. I’ve seen him aggressively close out multiple funding rounds while simultaneously keep up a rapid business tempo of producing results at the same time which is tough going.

Pushas — Justin Truong: Justin is impressive in terms of the wide ranging network of advisors and mentors he has put together while focused on growing Pushas which is a sneaker reselling logistics and market place business.

Canva — it has been crazy watching the progress of Canva since 2012 and how they have gone from small Sydney based start up to a global giant and one of the best companies in the world in general. I’m amazed at how the founding team has been able to scale up their operations to sustain this crazy level of growth and success

The story of three of Australia’s fastest growing startups — SafetyCulture, Vinomofo, and Canva — as they scale from garage offices to millions of users and worldwide impact.

Q: What are your opinions about the NZ startup ecosystem?

Mahesh: Awesomeness! It is early doors, I feel like it is where Aus was 5–7 years ago. There are tremendous founders all around. The ecosystem is starting to mature to ask the right questions around true high growth. We have been lucky to have had early pioneers who have made adequate space for the next wave of leadership and operators to join them in maturing the ecosystem. All of us have to keep pushing and aiming big. Software/tech scales. NZ has the required talent. It is time we stepped up to the challenge of building even more global solutions and powerful companies.

Dan: I’ve been based in Australia since 2008 so I’m not super across the NZ ecosystem in detail but a couple of observations I’ve had are:

Focusing on the NZ market only — the NZ market is often too small for many business models even if you get close to 100% of the total addressable market

Not aggressive enough — I’ve found the NZ market to not have the same level of competition as other markets globally which leads to many NZ founders not raising their level of aggressiveness when they expand outside of NZ

Q: Any advice you’d like to give/Any other comments?

Mahesh: Always keen to meet more Kiwi founders. Hit me up, always open to chat.

Dan: There is never a perfect time to start a business so if you are wanting to start a specific venture, why not now? You will always learn and adapt from your original concepts so the sooner you start, the faster you learn what will work and what doesn’t.

Think through what sort of business you want to work on — not every startup needs to be a VC backed hugely scaled global business, but if you are ambitious and want to push out to a global market, be aggressive and go hard!