Sam Keisner, Head of Venture at Startup Giants PLC
Due diligence should always be high no matter if you’re in a recession or not. At least in my opinion anyway. The heady bearish attitude for investment outside of a recession is almost worrying – when I sit back and think about it now, do investors really believe in the concepts and the people pitching them, or did they have money to burn and a more cavalier approach?
Speaking to friends of mine who are high up in the military and hearing how they assess risk was refreshing. Never making decisions based on fear or ignorance and verifying the facts as much as humanely possible leads to risk being mitigated. I think it’s a valuable lesson for investors to learn when ensuring that capital is still being pumped into startups in the UK and beyond.
It’s already been widely reported how many startups are born in a recession so I’m not going to repeat what you already know. Investment is crucial to the economy, to the general well being and innovation of a country. Whilst ‘tech’ supports the wealth, growth and mindset of many industries it’s often the way that when one thing is created it creates a solution and a whole new set of issues that need to be solved – enter new founders …
Knowing where to find your founders is crucial in an overrun marketplace
I think investors are wary depending on where the Founders are sourced from. At Startup Giants’ we specialise is providing qualified deal-flow of pre-seed businesses for investors via our platform. So investors come to us knowing that a lot of the work has been done already and the Founders have been strength tested by us. The deal flow for them is good and the focus shifts to matching themselves with the right deals for their portfolio. I can imagine it being like walking through a field of land mines without this process.
Let’s face it, it’s the person you’re investing in, so strength test their mettle. Do what the military do and give them scenarios and questions that are likely to arise. See how they consider their answers, deliberate how they communicate them back to you. How do they act under pressure?Can they cope with failure and keep pushing forwards?
When you’ve got potential founders in-front of you, these are five of my current go-to questions:
– What is your projected cashflow runway and how can that be extended?
Cash flow is king and I always ask this to see how the Founder is planning on surviving during the uptake of the business. I don’t believe it’s always necessary for the Founder to quit their day job straight away if the income is crucial to the business, however if this is the case then I want to see an exact time sheet of when the business is being worked on without the Founder being overwhelmed and exhausted.
– How will you adapt if you don’t get customers straight away?
In my opinion, founders need to work a number of verticals at one time to get off the ground and not just rely on one. I like hearing the different strategies for each one.
– Is your concept SEIS/EIS compliant?
If they’ve registered it, they’re either savvy or they’ve taken advice off someone who is, which in retrospect makes them savvy …
– What extra steps have you taken to mitigate risk for investors?
How is risk mitigated across every aspect of the company in fine detail? Let’s see how business minded the Founder really is. Have they got contracts with multiple suppliers of the same product to ensure that if a supplier goes under the whole business doesn’t fall apart?
– Which overheads have you chosen to lower to keep costs down and which are you continuing to spend in?
Test how financially minded and tenacious the founder is – have they re-negotiated with their suppliers, have they done an equity share to get a key hire? I’m always keen to hear what emphasis a founder places on marketing. Some cut the budget completely, whereas others bust their guts to keep the marketing budget high or work on collaborations with leading brands to stay front of mind to their consumers – this is essential in the early stages for traction so is a crucial indicator of their entrepreneurship.
