10 Startup Secrets that Investors Don’t Want You to Know! — TheCodeWork
Imagine being an entrepreneur in the past, where starting a business required a substantial amount of capital. Back then, founders had no choice but to take out loans, making it a challenging endeavor to get started. But things have evolved dramatically in the last few years. What has changed in the world of startups that makes it easier today? You might ask.
Great question! Recently, the game has changed significantly, primarily thanks to the technological revolution .Now, as you may already know, TheCodeWork launched its Zero-equity Startup Ecosystem just last year! It’s been quite a ride filled with immense knowledge. We discovered the most significant secrets that investors are not eager to share with entrepreneurs. Well, did I spark your curiosity? Trust me on this one!
The fact is that you don’t always need their capital investments to get started with your business. Like seriously? Yeszzz! My fellow entrepreneur. You can get started right away, once I reveal the 10 startup secrets that investors don’t want you to know.
“Far & away the best prize that life has to offer is the chance to work hard at work worth doing. “
So, nowadays just by merely riding on the wave of startup mega-trends, won’t secure you funding from investors. It won’t! But, rather you must actively seek opportunities to address significant problems or challenges within them. Sounds cliched? I know. But do you know? Approximately 20% of startups fail because they become overwhelmed with the contemporary trends, skipping the basics. However, for those nerve-wrecking moments while securing funds, I’ll equip you with the knowledge you need to succeed.
Now, Let’s get started!
Secrecy of Knowledge: The Most Crucial of the 10 Startup Secrets
The proverb “ knowledge is power” holds particularly true for startups. And once you get hold of that power, it will gear you up to change the entire game. Like how?
Well, entrepreneurs who are considered the best among the rest, possess an in-depth knowledge of the market which others don’t! The knowledge can include aspects like (Knowing where to raise capital from, how to craft an irresistible pitch, and what investors are really looking for!) Interesting, right?
But unfortunately, there is a constant gate-keeping of this knowledge, especially by the investors. It becomes challenging for investors to come across such entrepreneurs who possess it, because evaluative negotiations center on information & strategy. So, knowing when to hold firm, compromise, and how to structure deals in your favor can make all the difference.
Talking of which, we came in touch with several investors at the launch of our Zero-Equity Startup Ecosystem last year. What we discovered is,in a post-pandemic world, investors are more likely to invest in tangible products than just on ideas. Yes! And that’s one of the foremost reasons we always push entrepreneurs to validate their ideas with MVP’s.
Finally, allow me to reveal the 10 startup secrets for you to attract investors. Here we go.
1. Understanding Investor’s Perspective
Investors are often perceived as risk-takers, and while there’s some truth to this; it’s essential to realize that they are calculated risk-takers. Their primary goal is to grow their capital while managing risk as effectively as possible. It’s crucial to delve into the mindset of investors and understand what drives their decisions.
So, understanding their risk appetite is key to gaining their trust and securing their financial support. Now, let’s see how you can understand that as well:
- Risk Assessment: Investors conduct rigorous risk assessments before committing to a startup. They evaluate factors such as market volatility, competition, team dynamics, and business scalability. To align with their perspective, you should focus on demonstrating a thorough understanding of these elements and showcasing your ability.
- Portfolio Diversification: They might invest in various startups across different industries and stages of development. So, you should acknowledge that an investor’s decision may depend on how their startup fits into this broader portfolio strategy.
In order to have a clear-understanding of your portfolio diversification; It is advised to seek guidance from companies with whom you can partner for your startup solutions.
- Risk vs. Reward: A startup’s value proposition, competitive advantage, and growth potential are crucial factors in this equation. Presenting a compelling case for the potential return on investment is vital to attract investor interest
By grasping these key aspects of the investor’s mindset, you can tailor your fundraising strategies. As you progress, you will be building trust, and increase your chances of securing future investments.
2. The Investor’s Risk Tolerance
When it comes to investing, one of the most critical but often misunderstood factors is an investor’s risk tolerance. In simple terms, risk tolerance refers to an investor’s ability & willingness to withstand the ups & downs of the financial markets.
Here’s a more in-depth exploration of the investor’s risk tolerance:
- Understanding Risk Tolerance: Risk tolerance isn’t a one-size-fits-all concept. It varies from person to person based on their financial situation, goals, personality, and past experiences. Some investors are natural risk-averse, preferring stability, while others are comfortable taking on higher risks in pursuit of greater rewards.
- Factors Influencing Risk Tolerance: Several factors influence an investor’s risk tolerance:
- Financial Situation: An investor with a substantial financial cushion may be more willing to take risks than someone with limited resources.
- Investment Goals: Short-term and long-term goals play a role. Those saving for retirement might have a higher risk tolerance for long-term investments.
- Experience: Experienced investors may have a higher tolerance for risk due to their knowledge of the markets.
- Adjusting Over Time: Note, the risk tolerance isn’t static. It can change as per financial circumstances, goals, and evolving situations. Regularly reassessing risk tolerance is crucial to ensure that investments remain aligned with objectives.
- Diversification and Risk Mitigation: Diversification, by spreading investments across different assets, industries, and geographic regions, is a strategy often used to manage risk.
60% of investors rely on financial advisors for guidance on risk tolerance and investment decisions.
The investor’s risk tolerance is a fundamental consideration in investment decision-making. Easily one of the 10 startup secrets listed here. Obviously you know that I would assume!
It’s a complex interplay of financial, psychological, and life factors that influence how individuals approach risk in their investment strategies. So, understanding one’s risk tolerance is essential for creating a well-balanced & suitable investment portfolio that aligns with long-term financial goals.
3. Why do investors prioritize the team?
When investors evaluate startups for potential investment, one factor consistently takes center stage: The team behind the venture. This is a major section among the 10 startup secrets.
Afterall, a brilliant idea alone does not guarantee success. Does it? Investors know that it’s the team’s ability to execute that turns a concept into a profitable business. Also, Harvard Business Review found that 65% of early-stage investors are more influenced by the quality of the team; (than by the market opportunity when making investment decisions).
A deeper dive into why investors prioritize the team:
- Adaptability: The startup landscape is unpredictable. Well, what is? And market dynamics can change rapidly, and unforeseen obstacles can arise. So, investors look for teams that have demonstrated adaptability, resilience, and the capacity to learn from failures.
- Complementary Skills: Successful startups require a mix of skills — technical, operational, marketing, and more. Investors seek teams with members who bring complementary skills to the table, ensuring that all critical aspects are covered.
And that’s exactly what TheCodeWork offers in its Zero-Equity Startup Ecosystem, let it be technical, legal or financial support. We got it all!
McKinsey & Company suggests that companies with ethnically diverse executive teams are 33% more likely to attract investors.
- Market Insights: The team’s understanding of the target market and industry is invaluable. Investors look for teams that have deep insights into customer needs, market trends, and potential competitive advantages.
- Network and Relationships: Well-connected teams can open doors to valuable partnerships, customers, and investors. Investors appreciate teams that bring a network of contacts and relationships that can benefit the startup.
Track Record: A team’s track record of past achievements, whether in previous startups, corporate roles, or academia, is a strong indicator. It demonstrates expertise and a history of accomplishments can instill confidence in investors.
On the TV show “ SharkTank, “ investors place a significant emphasis on the entrepreneur’s background, skills, and the team they have.
To sum up, the idea, product, and market are undeniably important! But a skilled team is a must-have to adapt to challenges and pivot when necessary.
4. The Art of Valuation
How is valuation in the list of 10 startup secrets? Well, here’s the secret insight!
Valuation is both a science and an art in the world of finance and investing. It refers to the process of determining the intrinsic or market value of an asset, business, or investment opportunity. It is a critical aspect of decision-making for investors, entrepreneurs, and financial professionals.
So, let’s go through an in-depth exploration of the art of valuation:
- Objective and Subjective Factors: Valuation combines objective quantitative analysis with subjective qualitative judgment. So, financial metrics like revenue, earnings, & assets are essential, along with qualitative factors like market dynamics, competitive advantage, & management.
- Different Valuation Methods: There are various valuation methods, including the Discounted Cash Flow (DCF) method, Comparable Company Analysis (CCA) & Precedent Transactions Analysis (PTA). Each method has its strengths and weaknesses, and the choice depends on the asset or business being valued.
To learn more, you can have a look here!
So, Coming back.
- Intrinsic vs. Market Value: Intrinsic value represents what an asset is worth based on its fundamentals, such as future cash flows. Market value, on the other hand, is the price an asset can be bought/sold for in the open market. This valuation aims to bridge the gap between these two values.
- Industry Expertise: Valuation often requires industry-specific knowledge. Understanding the dynamics, trends, and competitive landscape of a particular industry is vital for accurately valuing businesses within it. TheCodeWork can get it done for you!
In essence, valuation requires a deep understanding of financial principles, a grasp of market dynamics, and the ability to synthesize complex information. So, valuation is not a one-size-fits-all process;
It is tailored to fit a specific asset or business being evaluated. Although, it requires a combination of quantitative analysis and qualitative judgment at times.
5. The Dilution Dilemma
The “ dilution dilemma” is a common challenge faced by early-stage startups, particularly those who have secured funding through equity investment. It refers to the situation where the ownership stake of the founders & early-investors in a startup is reduced or “ diluted “.
The extent of dilution can vary widely based on factors like the stage of funding, valuation, & terms. In some cases, early-stage startups may experience dilution of 20% or more with each funding round. Terrified? Don’t be, relax.
Such scenarios can only take place if you are not knowledgeable about the fundamental logic behind this game.
So, to avoid it let’s take a cautious look at this:
- Fundamental of Equity Financing: Equity financing is a common method for startups to raise capital. It involves selling ownership stakes (shares or equity) in the company to investors in exchange for funding. While this provides much-needed capital for growth, it also means giving up a portion of ownership. So, think wisely!
- Ownership Stake Reduction: As a startup raises multiple rounds of funding, the ownership stakes of early investors and founders are gradually reduced. This occurs because new shares are issued to accommodate the incoming investment. Also, it effectively spreads the ownership among a larger pool of stakeholders.
- Balancing Growth and Ownership: The dilution dilemma centers on the challenge of balancing the need for capital to fund growth with a desire. And what is it you desire?
Ofcourse! To retain a significant ownership stake. Nowadays, founders often face these scenarios, where they either have to accept dilution in exchange for funds or retain ownership.
Zynga: The social gaming company behind FarmVille and other popular games, faced dilution issues during its rapid growth phase. It went public in 2011, but high levels of equity grants to employees and a declining stock price led to significant dilution of early investors.
Hence, the dilution added up to the list of challenges in maintaining profitability and stock value.
Apparently, we too have come across certain startups who faced similar dilution issues. And fortunately enough, we were able to straighten them out for them with guidance of our Stratup Ecosystem experts.
Google’s founders, Larry Page and Sergey Brin, opted for a Dutch auction IPO in 2004. This method allowed them to set the offering price and reduce the risk of dilution to existing shareholders.
- Strategies for Mitigation: Founders often employ several strategies to mitigate the dilution dilemma:
- Negotiation: Skilled negotiation during funding rounds can lead to more favorable terms and reduced dilution.
- Bootstrapping: Some founders choose to fund their startups through personal savings, revenue, or loans to minimize dilution.
- Equity Preservation: Founders can issue different classes of shares with varying voting rights to maintain control.
- Secondary Sales: In some cases, founders and early employees may sell a portion of their equity in secondary transactions. Well, how cool is that?
This dilemma is an inherent part of the startup funding journey. It reflects the trade-off between securing the necessary capital to grow and maintaining ownership and control. Successful founders & entrepreneurs navigate this dilemma by understanding its dynamics, negotiating effectively, & making strategic decisions aligning their long-term goals.
Now, since we have mid-journeyed this far; let me mention that the rest among these 10 startup secrets are the paramount when it comes to secure funding. So, be prudent!
6. Strings Attached: Investor Expectations
When entrepreneurs and startup founders seek investment capital, they often find that it doesn’t come without certain expectations and conditions. Again, what in life does? this ain’t a part of the 10 startup secrets though (*winks*).
The phrase “ strings attached “ refers to these conditions and obligations that investors may impose when providing funding to a startup.
Here’s a deeper exploration of investor expectations and the implications for startups:
- Return on Investment (ROI): The primary expectation investors have is a return on their investment. They invest capital with the anticipation of receiving a financial return, whether through capital appreciation, dividends, or other mechanisms. This expectation of financial gain is the fundamental motivator for most investors.
- Financial Metrics and Milestones: Investors often set specific financial metrics and milestones that the startup must achieve. These can include revenue targets, user acquisition goals, profitability thresholds, or other key performance indicators (KPIs). For e.g, Retention rates and customer lifetime values.
- Control Over Spending: Investors may impose controls or limitations on how a startup spends its capital. This can involve budget approval processes, restrictions on certain expenses, or the need for investor consent for significant financial decisions.
- Alignment of Interests: While there are “strings attached,” successful investor-founder relationships are often built on shared interests and goals. Investors want to see the startup thrive and will provide support, mentorship, and resources to help achieve mutual success.
In Warren Buffet’s annual letters to shareholders, he emphasizes the importance of understanding investor expectations, maintaining transparency, & fostering long-term trust.
Navigating these investor expectations requires effective communication, negotiation, and alignment of interests between founders and investors. Startups must carefully consider the terms & conditions of investment agreements, as they can have a profound impact on the company.
7. Preparing your startup for scrutiny
When startups seek investment or partnership opportunities, they often undergo rigorous scrutiny, evaluation, & due diligence by potential investors, or acquirers. In a survey by AngelList, investors indicated that the top factors (consider as one of the 10 startup secrets here), they consider during due diligence are: T he team (72%), market (60%), and the product (49%). So, this scrutiny is an essential part of the decision-making process and can significantly impact the outcome.
An in-depth exploration of how to prepare your startup for scrutiny:
- Organize Your Financials: Start by organizing your financial records meritoriously. No, that’s not a typo! I meant it; by your positive income statements, balance sheets, cash flow statements, and any financial projections. Investors will want to understand your financial history, current financial health, and future financial expectations.
- Legal and Compliance: Ensure that your startup is compliant with all relevant laws and regulations. This includes business licenses, permits, contracts, intellectual property rights, and any pending legal issues. Addressing legal matters upfront can prevent surprises during due diligence.
Looking for legal guidance for your startup venture? Look no further! TheCodeWork’s Startup Ecosystem will offer its best-in class legal support and more when it comes to aid your ventures.
- Intellectual Property (IP) Protection: If your startup relies on intellectual property, such as patents, trademarks, or copyrights, make sure they are properly protected.
- Third-Party Audits: Consider getting third-party audits or assessments of critical aspects of your startup, such as financials or cybersecurity. These audits can provide credibility during scrutiny. A *smirk*, it deserves.
Technology and Product Development: If your startup is tech-oriented, be prepared to discuss your technology stack, development processes, and any proprietary technology. Investors may want to understand your product roadmap and technical capabilities before proceeding further.
Tesla: Has faced ongoing scrutiny from its investors due to its ambitious growth targets, production challenges, & Musk’s behavior on social media. Institutional investors like pension funds and activist investors have at times questioned Musk’s leadership and governance of the company.
So you see, preparing your startup for scrutiny is not just about presenting a polished image; it’s about building a strong foundation of transparency, compliance, and readiness for growth. A well-prepared startup always instills confidence in investors and partners, leading to more successful fundraising rounds or strategic partnerships.
Discover more than the list of 10 startup secrets with TheCodeWork’s startup ecosystem at place!
8. Investing potential Investors
When a startup seeks investment, it’s not just about finding any investor-it’s about finding the right investor who aligns with the company’s vision, values, and growth objectives. Investigating potential investors is a critical step in the fundraising process for your startup venture to kick-off.
Let’s get a detailed look at how to investigate potential investors before approaching one:
Background Research: Start by conducting comprehensive background research on the potential investor. This includes understanding their investment history, portfolio companies, and any previous successful exits.
Pro-tip: Look for investors who have experience in your industry or a track record of supporting startups in a similar stage.
- Alignment with Your Business: Assess how well the investor’s interests align with your business. Consider whether they have invested in companies with a similar business model, target market, or technology. Alignment increases the likelihood of a productive partnership.
- Investment Thesis: Understand the investor’s investment thesis and objectives. Some investors may focus on early-stage startups, while others prefer later-stage companies. Ensure that their investment strategy aligns with your stage of growth and funding needs.
Trivia: According to Crunchbase, the United States, China, & India are among the leading countries in terms of securing venture capital investment.
Due Diligence: Investors conduct due diligence on startups, you know that! But do you know? It’s also important for entrepreneurs to perform due diligence on potential investors as well. Request information about their investment process, decision-making timeline, and any due diligence they intend to conduct on your company.
Investigating potential investors is a vital part of the fundraising process that can significantly impact the future. By conducting thorough research like this, you can identify investors who not only provide capital but also bring strategic value.
9. Pivoting when necessary
In the world of startups and entrepreneurship, the term “pivoting” refers to the strategic decision to change the fundamentals. For example, your product, target market, or business model. Pivoting is often necessary when a startup faces challenges or shifts in market conditions. Because, it suggests that the current path is not leading to success.
Also, TechCrunch found that startups that pivoted raised 2.5 times more capital than those who didn’t pivot.
Here’s a detailed exploration of pivoting and when it becomes necessary:
1. Types of Pivots:
- Market Pivot: A market pivot involves shifting the target audience or customer segment. It may involve refocusing on a different demographic or industry.
- Product Pivot: This involves altering the core product or service to better meet customer needs. It may include changing features, functionality, or the overall offering.
- Technology Pivot: In some cases, a pivot may revolve around a change in the underlying technology or platform.
- Business Model Pivot: Changing the way of generating revenue, such as shifting from a subscription model to a freemium model or vice versa.
2. Reasons for Pivoting:
- Lack of Product-Market Fit: If the product or service doesn’t resonate with the target market or doesn’t solve a significant problem. Well, It’s a redflag! I would say, yes for a pivot.
3. Planning and Execution:
- Resource Allocation: Allocate resources, including time, talent, and capital, effectively to support the pivot.
- Communication: Transparently communicate the pivot to employees, stakeholders, and customers. Managing expectations and maintaining trust is crucial.
- Iterative Approach: Pivoting is often an iterative process. Be prepared to make further adjustments based on real-world results.
But, to avoid such a scenario, always launch a MVP! To get the best insights from your market demographics and pivot accordingly.
- Changing Market Conditions: External factors, such as economic changes, technological advancements, or shifts in consumer behavior, can necessitate a pivot to adapt.
- Financial Viability: If struggling financially or not achieving sustainable growth, a pivot is necessary to find a more profitable path.
Also, many startups follow the principles of the Lean Startup methodology, which emphasizes the importance of rapid experimentation and adaptation.
Examples of Successful Pivots:
- Instagram: Originally a location-based check-in app called Burbn, it pivoted to focus solely on photo-sharing, ultimately becoming Instagram.
- Slack: Initially developed as a gaming platform called Tiny Speck, they pivoted to create the widely used messaging platform for teams.
- Twitter: At first, it was a podcast platform called Odeo, it pivoted to become the microblogging platform Twitter.
Pivoting when necessary is a strategic and adaptive approach to entrepreneurship. It requires a willingness to embrace change, learn from failures, and seize new opportunities. Successful pivots have led to the transformation of startups into industry leaders. It’s testament to the resilience and innovation that define entrepreneurship.
10. The Ultimate Secret: Perseverance
Perseverance is often hailed as the ultimate success behind any endeavor in the world. It is absolutely worth the steadfast determination to continue pursuing one’s goals and ambitions despite challenges, setbacks, failures, and obstacles.
Here’s an in-depth exploration of why perseverance is the ultimate reason behind startup success:
- Resisting the Urge to Quit: There are moments in the startup journey when quitting may seem like the easiest option. However, perseverance instills confidence in investors when they see founders committed to their vision, even when things are tough.
- Continuous Iteration: Perseverance encourages a mindset of continuous iteration and improvement. Investors understand that success often involves multiple attempts and constant refinement of ideas and strategies.
- Adaptation and Flexibility: Perseverance doesn’t mean stubbornly sticking to a failing plan. It involves adaptability and the ability to pivot when necessary, all while maintaining the determination to reach the ultimate goal.
- Community and Support: Perseverance is often nurtured through a supportive community of fellow entrepreneurs, mentors, & advisors who offer encouragement, guidance, and shared experiences.
Perseverance contributes to the legacy of a startup and its investors. It compounds over time. Each small step forward, even in the face of setbacks, contributes to progress and eventual success. It’s the ultimate secret that empowers founders to turn their dreams into reality and create lasting impact through their startups.
Final words of advice for Startup founders
Starting and running a startup is a challenging and rewarding journey filled with highs and lows. Here are some final words of advice for startup founders as you head your way to success; with the aid of these 10 startup secrets:
- Build a Strong Team: Your team is your greatest asset. Hire individuals who complement your skills and share your vision. Foster a positive and collaborative work environment to maximize productivity.
- Seek Mentorship: Surround yourself with mentors and advisors who can provide guidance and share their experiences. Their insights can help you avoid common pitfalls and make informed decisions.
- Customer-Centric Approach: Listen to your customers. Understand their needs, pain points, & feedback. Building a product or service that truly solves their problems is key to success.
- Iterate and Pivot: Don’t be afraid to iterate on your product or pivot your business model if needed. Be adaptable and open to change based on market feedback and evolving circumstances.
And that’s why, it is always recommended to get started with a Minimum Viable Product (MVP).
Finally, remember that the journey itself is valuable. So, enjoy the process of building and growing your startup. The experiences, relationships, and lessons along the way are part of your entrepreneurial story.
Finally, we’ve delved into the 10 startup secrets that investors often keep hidden. And demystified the funding landscape and empowered you with insightful knowledge.
Now, as you stand at the crossroads of your entrepreneurial future, the secrets and insights shared in this blog; Aims to equip you with the knowledge and tools needed to thrive in the dynamic world of startups. Remember that while success may not come overnight, each step forward brings you closer to achieving your desired funding.
Discover much more than just 10 startup secrets, at TheCodeWork’s LinkedIn Community to learn from the best, and stand out from the rest!
Also, Building a startup is not just about creating something or securing funding; it’s about cementing a legacy. It is the making of an unfading mark, leaving it better than you found it. So, here’s to the startups of tomorrow and the entrepreneurs who dare to dream, and soar high.