Post-Investment Acceleration – the panacea to venture failures!
The Hippocratic Oath is an oath of ethics historically taken by physicians around the world. It is one of the most widely known of Greek medical texts. In its original form, it requires anew physicianto swear, by a number of healing gods, to uphold specific ethical standards. Written in antiquity, its principles are held sacred by doctors to this day:treat the sick to the best of one’s ability,preserve patient privacy,teach the secrets of medicine to the next generationamongst others. In the post COVID world, early stage venture capital around the world will probably allegorize the Oath into their own version forstartup Founders, emphasizing on principles such asfocus on revenue, ethical approach towards doing business, transparency to shareholders and utmost commitment to investor value!
‘Due diligence‘, which means reasonable care, has been an integral part of most investment decisions, not just in the venture capital and private equity space but across all asset classes.
It is typically a pre-investment, investigative approach where the objective is to verify data points and claims by the issuer. The outcome either establishes veracity of representations or may highlight gaps. It allows informed decision-making by prospective investors. What it does not establish though, especially with early stage startups is ensuring a robust operational framework post-investment. How do angels and seed funds ensure that complacency doesn’t set in with Founders once money is in the bank, that the Founders do not fall in love with their own vision at the cost of opportune pivots, that precious cash is not burnt based on an unsubstantiated hypothesis or that the Founders turn their attention to the next round of funding rather than build value based on the recently received funding! These concerns have been valid and omnipresent across ecosystems globally and will be further emphasized in the post COVID world! Ifwell-capitalized startups around the world have failed, how do early stage investors with limited operational resources further mitigate the risk of their portfolio failure?
An interestingCB Insights Reportpublished in November 2019 highlighted the top 20 reasons of startup failure based on a post mortem conducted on 101 reported startup failures.
Besides systemic & macro challenges, inherent issues such asinsufficient runway, flawed team composition, resource optimization & focus, lack of intelligent pricing mechanisms, ignorance on customer feedback, failed geographical expansionamongst others contributed to higher failure rates. This is not an ecosystem specific problem but the pain points have been resonated by early stage investors around the world.
The ‘Panacea‘ or universal cure for rising startup failure rates post-investment is ensuring dedicated acceleration support.
Just as pre-investment due diligence is an established risk mitigation practice, it is time for early stage investors to seriously consider putting in place a framework for post-investment acceleration.
Some of the key drivers for routing $$$ to early stage startups vis-a-vis more established and listed companies is faster growth rates and higher RoI potential. Despite lower failure risks, listed companies have robust corporate governance practices, a seamless investor relations framework, dedicated resources for fund-raising and building corporate relationships. The question that every angel and seed investor must ask themselves is, despite a higher risk profile, why don’t my investment $$$ provide the same risk mitigation attributes to my private equity portfolio??? How can my investee Founders be more efficient being focused on driving value to clients, managing an efficient burn rate and creating tangible value rather than being stretched on knocking on VC and corporate doors for more resources? How do my investee Founders stay focused on creating value in the business whilst staging the company for Series A?
With reference to some stats collated byEmbroker,reflected below are focus areas foristarthub Acceleratorsthat mitigate risk for our Investment Partners and attempt to address some of the questions highlighted above;
“The average time between funding rounds
from Seed to Series A is 22 months” –Carta|
istarthub Accelerators focus on
reducing this timeframe
by expediting value generation
“67% of Series A funded startups in 2017 were
already generating revenue
before being funded.” –TechCrunch|
istarthub Accelerators focus on driving revenue
and channel development
“Failure is most common for startups during years
two through five, with 70% falling into this category.” –Failory|
istarthub Accelerators emphasize
on investor relations and
“Startup owners spend around 40%
of their working hours on tasks
that do not generate income…” –Entrepreneur|
istarthub Accelerators focus on non-core activities
such as Access to Capital, Investor Relations
& Corporate Governance
The narrative that 8 out of 10 startups fail needs to be revisited in the post COVID world! In a world where every single investor $ will be lured by multiple, risk mitigated asset classes such as real estate, capital markets and precious metals, early stage venture capital has now aPanaceain the form ofistarthub Acceleratorsto change the post-seed investment failure narrative and emerge as an attractive asset class that can not only build consistent value but also provide capital churning through liquidity events.
Authored By –Ashwin Sanzgiri
Ashwin is the Program Director for istarthub Acceleration Programs in Ontario, Canada
and also the Chief Catalyst of the CBA Catalysts of Brampton,
Brampton’s first and only managed Angel Investment Group.