Last year, 2023, will be remembered in the tech world for massive losses, as 3,200 startups and over $27 billion in venture funding evaporated, not to mention the most significant U.S. bank collapses since 2008.
At the same time, venture investment into early-stage businesses declined significantly, with VCs undertaking greater due diligence and displaying reticence toward founders unable to signpost a clear pathway to profitability.
While investors seem confident that 2024 will see increased deal flows following a cagey 12 months and the accumulation of a lot of dry powder, the onus remains on startup teams to convince VCs of their backability.
In truth, many entrepreneurs — particularly first-time founders — will likely end the year disappointed. They continue to labor under the dual misapprehension that ideas are sacrosanct and that technical supremacy is the key to startup success.
Great ideas are commonplace, great teams are not
As Bill Gates famously said, “Intellectual property has the shelf life of a banana!” First, founders must understand that entrepreneurial success is not about the idea. There is no shortage of exciting business ideas out there; indeed, its multiple founders frequently experience the same lightbulb moments and go on to develop near-identical business propositions.
What makes startups more likely to succeed is the quality of the team, their ability to execute, and their sense of timing — the most inscrutable element of company building.
What makes startups more likely to succeed is the quality of the team, their ability to execute, and their sense of timing.
Like many seasoned investors, I’ve been preaching the virtues of “team, timing, and execution” for years. And yet, I still meet cohort upon cohort of founders who are strong on tech but need more fundamental company leadership skills and the requisite interpersonal skills.
Don’t get me wrong — technical prowess is undoubtedly essential, particularly when building enterprise SaaS solutions where “good enough” is not, in reality, good enough. However, it is only a small piece of the puzzle.
According to the Carnegie Institute of Technology, 85% of financial success stems from an individual’s soft skills and ability to communicate, negotiate, and lead effectively. These founders can deliver a clear message, show passion, demonstrate empathy, and build customer rapport, helping them identify product-market fit and master the sales process.
Likewise, they’re more likely to assemble winning teams and bring everyone with them on the difficult growth journey ahead because they understand what it takes to run a business and what it means to be a CEO — to hire, fire, and execute a business plan with laser-focused clarity.
By contrast, I continue to meet scores of technically minded founders who lack interpersonal skills and are too wedded to their original, ingenious ideas to adapt to what their target market is signaling, let alone manage a high-performing team through this tricky process and across the chasm to mass adoption. Inevitably, their nascent businesses flounder in a mist of aimless R&D and product iteration as they look for problems to solve until the well eventually runs dry.
Validation is key
I speak to as many as 25 different founders every week, many of whom have already succeeded in raising some level of venture investment and can articulate their product proposition and vision in great detail. And yet, when I ask what specific problem they’re solving, the vast majority struggle to give me a coherent answer. They’ve fallen in love with an idea, built a solution, and are now searching for a problem to fit their product. It’s a topsy-turvy way of thinking that is unlikely to deliver a positive outcome.
Again, this is not to pour scorn on the idea or criticize the early-stage investors who have backed it. The role of angel and seed investors is to surface promising ideas, supercharge them, and see what happens. If one in 10 of these ventures succeeds, that’s a good outcome for them. It’s a numbers game by necessity, as investors can’t do meaningful due diligence at the ideas stage. Besides, there are never any guarantees with such early-stage investments.
Having secured their initial backing, the challenge for founders is to validate their idea and prove that it is accurate, pressing, and something customers are willing to pay for. This isn’t a hypothetical exercise — it involves going out and finding 10 target customers for whom the problem is a high priority, identifying their pain points, and tailoring the product to address their specific needs. It is the fundamental block of achieving product/market fit.
Through this validation process, founders can pinpoint the true scale of the opportunity and determine — with high accuracy — the amount these customers are realistically likely to spend on a promising solution. It’s how they determine the viability of their business model and, ultimately, whether the idea is fit to pursue in its current form.
A personal connection
Consistently, the startups that go the distance are the ones where the founders have a personal connection to the problem they are solving and the company they are building.
These founders understand the problem because they’ve lived and breathed it. They’ve experienced it in previous roles, observed across a former client base, or heard it flagged a thousand times by old colleagues and industry associates.
Crucially, budding entrepreneurs should not look to build companies purely to take advantage of a perceived opportunity. While this philosophy sometimes gets misconstrued as high-minded, when viewed through the prism of “team, timing, and execution,” it’s common business sense. A team that personally identifies with the problem is more likely to find product-market fit and successfully navigate the inevitable hurdles that emerge along the growth journey.
This is a problem for tech-led and first-time founders alike, a trap they fall into when the allure of a great idea overcomes their ability to think rationally and realistically about the market in front of them.
Laying the groundwork for effective execution
Effective execution requires clarity, focus, and discipline. Launching a tech startup is an exciting venture; however, too often, founders get so caught up in the thrill of building a new, possibly game-changing product that they lose sight of their main goal and spread themselves too thin. For example, creating an offering that solves multiple problems is admirable but misguided, especially for first-time entrepreneurs. Being laser-focused on a singular, tangible problem for a specific target audience in a clearly defined market will allow for more capital efficiency and an accelerated path to product-market fit.
Another factor that makes a big difference from an execution perspective is clarity and consensus across the leadership team. When speaking to emerging startups, I like to see an operating agreement among the founders, with clear roles and responsibilities, use of restricted stock, and other provisions to ensure proper conflict resolution if and when needed.
Timing is everything with target investors
A startup that boasts the full gamut of leadership skills and has taken the time to validate its idea and business model will invariably enhance its appeal to prospective investors. However, to maximize the chances of finding success at each point in the venture growth trajectory, founders must also have a keen sense of who they are targeting and when.
Different VCs have their areas of specialization — by technology, industry, and geography. They invest at different stages in the journey and have clear preferences regarding check size, funding round participation, or operational involvement. Target investors will have existing portfolios to balance and differing amounts of capital left to deploy in their funds. According to a startup’s projected revenues, growth, or unit economics, this will make certain investments more or less attractive to them.
This is where an understanding of timing is critical. Founders need to recognize which investors are likely to be receptive at any given point, build relationships early (as large checks are rarely signed overnight) and create optionality ahead of every fundraise. The goal in each round must be ensuring the path to the next round, and it always takes time to lay the groundwork.
Solving real problems
As VCs commit to more due diligence than ever following a difficult year for venture investment, it’s time to end misguided entrepreneurial notions regarding the importance of ideas and refocus on team, timing, and execution as the essential elements of venture-backed startup success.
There is no such thing as a cast-iron investment case. But by addressing the team, timing, and execution from the outset and doubling down on problem-solving and customer validation, founders can optimize their credibility as backable prospects and give themselves the best possible chance of going the distance.