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Nirjhor Rahman: 8 Signs a Startup Founder is Not Ready to Take On Outside Investors

I've been with Bangladesh Angels for a little over a year now, and it's been a roller coaster ride throughout. Every day I'm learning something new. It happens because I get to structure my day around meeting founders working on exciting things, with a genuine zeal and passion to change the country, as well as learning from angels on how they've been successful and think about business problems in Bangladesh.

One of the biggest things I've learned is that a successful early-stage investment in digital startups and early-stage businesses is 90% predicated on the quality of the founder and the founding team and the behavior they exhibit, whether in the screening process, at the showcase, during the due diligence, negotiation, disbursement, and post-investment. The other 10% is doing proper due diligence on the company itself, how you structure the deal and work done post-deal (all subjects of future posts) but I would say at this stage in the cycle of a business, you are betting on the founder(s). The quality of their character, experience base and skillsets is far more important than any business strategy, pitch deck, app, data room or financial model.

With the benefit of hindsight, and interviews with 100's of entrepreneurs over the past year, I wanted to communicate a few red flags that communicate to me that a startup founder is not ready to take on outside investors:

1. They cannot give me basic data. I'm always surprised when an entrepreneur "needs to get back" to me about last month's revenues, or basic KPIs such as average basket size, conversion rates, lead time, customer acquisition cost, month-over-month growth rate, retention rates, etc.

Many struggles when asked, point-blank, what their goals are for 12-18 months and how much money they need to accomplish them. They don't have a defined target segment and demographics and spending data and purchase/consumption behavior. They can’t tell me in detail about their competitors and analogs in other markets or I’m having to tell them. Part of it may be that we as an ecosystem are not doing a good job teaching them, but the onus is also on the founders to be prepared for these meetings.

2. Taking revenue for granted. It always makes me queasy when an entrepreneur believes that if he or she raises enough funds and spends that money to expand their team and complete development on a product and markets it, at some point the business's revenues and costs will magically break-even. Unfortunately, we are not Silicon Valley. You have to treat each round of funding as it could be your last, because it may be.

The funding ecosystem is still pre-mature. Even if you can raise money from angels, there's no guarantee you can raise the next round from institutions, even if you have the traction and exhibit the right characteristics. Raising money from abroad sounds good in theory, but you need very good advisers and champions with strong networks on your side, as well as extremely good communications skills, and potentially globally recognized credentials, among other things (the subject of another post).

I like the founders who are laser-focused on monetization, and getting money in the bank. It also gives you a lot more leverage when speaking to investors, because you're not perpetually in a fund crisis. Customers - especially repeat ones - are your first and forever most important investors.

3. Being product-focused, and not business-focused. In a more mature ecosystem, founders can focus on product, and use venture capital and ESOPs to professionalize their start-up by hiring seasoned veterans from mature start-ups and corporates to handle executive functions such as marketing, operations, and finance, among others. This is much harder in Bangladesh, where a corporate job is a literal meal ticket to a lifestyle that most start-ups cannot offer because we've yet to have sufficient liquidity and exits.

A founder, or most likely, a founding team has to be able to balance strong product ethos and development skills with the ability to manage budgets, recruit and nurture team members, build relationships with customers and close deals, communicate and negotiate with investors, etc.

Business development is not as simple as "give me money and I'll market the hell out of this on Facebook." It's a lot to ask, and that's why strong entrepreneurs are rare unicorns.  This is also a reason why solo entrepreneurs need help, and younger founders may be better positioned if they spent a few years apprenticing under established entrepreneurs and organisations.

4. Being business-focused, and not product-focused. This is the other side of the coin. I'm alarmed by a founding team without a technical co-founder, or one with deep subject matter expertise creating or developing products and solutions in the sector they want to work in. They assume everything can be hired or outsourced. They take their product strategy and development, user experience and other matters, and therefore their customers, for granted.  They underestimate how hard it is to turn on a dime or adjust your product according to user feedback when you're dealing with outside vendors.

It's also not as simple as hiring a technical or product lead. Ultimately, the founders need to be driving this and must have the skills to do so. Otherwise, angels are essentially paying for their tuition.

5. Doing too many things outside of your company. This is one of the most common negative attributes I see in Bangladesh. A founder or founding team owns a trading company, has shares in a software development firm, sits as a part-time director in their family business, gives lectures on entrepreneurship or attends startup conferences on the weekends, and is starting one if not multiple start-ups.  Then they come to me, and over the course of a 30-min sit-down, pitch me at least two different ideas.

Building a business especially in a country like Bangladesh, where the odds are stacked against you in a million different ways, is and should be an all-consuming endeavor.

Investors want it to be an all-consuming endeavour. They want every possible waking moment of your life to be spent figuring out how you can get their money back and multiply it. It's not something you can do part-time.  It's OK if you have a software development firm that has to do projects to fund your team or have to do consulting work in an area that is related to your startup, in order to fund your expenses. You have to hustle to make ends meet, and some of these experiences can feed into building your start-up. But there's a clear difference between survival and vanity or greed.

6. Doing too many things within your company. Often, it's a resourcing issue. But other times, it's also an ego issue. If your strength is in software development, then let one of your founding team members handle customer development.

I like founding teams with a strong delineation of responsibilities, with founders recognizing their strengths as well as weaknesses and complementing them as soon as possible through a combination of co-founders, investors, advisors, partners, and team members. 

This also applies to doing too many things as a startup. More often than I'd like, I find a company simultaneously launching two or more separate products and services, with very different business models and target markets, at the same time. It's best to go with the idea you're most passionate about or seems to have the most promise, and then pivot to the other if it doesn't work, or add new product and service lines that compliment your primary ones only after they start seeing traction and scale. Dilution of founders' time and focus is just as detrimental to the future of their business as the dilution of their shares.

7. Being a part-time founder, with a foot out the door (or in a foreign country). I have to hold my tongue whenever someone pitches me a brilliant idea or a project and then tells me that part of the fundraising is to hire a CEO and team to execute it and/or grow it while they continue to be in their existing job/business/country.

So you're asking angels to invest their money into a company that you're not fully committed to? And ultimately, who are they investing in, yourself or that hired hand who will get some compensation and nominal shares? Will these hired hands truly give their heart and soul, or would this be a job for them? If you have the idea, then you should own it, full stop. If it means coming back to Bangladesh for a few years to develop the idea, then take the leap. As someone who has, I promise you it can be extremely rewarding.

If you have the humility to say that you're not the person to execute it, then kudos to you. But you should then find a founding team with a similar vision, invest in them and mentor them because that's where your strengths lie: as a board member/investor, not as a majority owner and entrepreneur, at least not for that idea.

8. They're not open and hungry to ideas. What I learned from observing the most experienced angels in the network is that they're very good at taking an initial pitch from an entrepreneur, figuring out ways in which it could be improved, and pitching those back to the entrepreneur. Good founders take that advice to heart, and will either say they tried it, or say they will at least consider it, and they do and come back and tell the investor the results. They are also constantly scouring templates and examples, both globally and locally, and taking the best ideas.

Weaker founders will pay lip service, and continue on their path. Even if the evidence says otherwise, they will continue on and blame a lack of funds and resources for their lack of traction.

These are some of my observations, though not all. I'm keen on your thoughts as well. What are other red flags we should worry about?

Nirjhor Rahman is the CEO of Bangladesh Angels, the country's first angel investment network that connects startups with capital via individual and institutional investors. Previously, he was Country Director for ygap, a social enterprise accelerator where he helped build a national venture network. He can be reached at nirjhor.rahman@bdangels.co.

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