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My entrepreneurial scorecard

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Lists of entrepreneurial qualities abound on the web.  Heck, I even ran a couple surveys when I first started this blog.   After a couple years of working with entrepreneurs and start-ups, I’ve come to the conclusion that while entrepreneurs in aggregate do exhibit many similar personal qualities, the success of their start-up is a different issue altogether and tied to a much more subtle and extensive set of factors.

That observation combined with my natural orientation to practical, real-world information, and I’ve personally grown very tired of talking about entrepreneurial qualities.  I’ve met plenty of passionate, committed, tireless, social, driven, etc., etc., etc. entrepreneurs whose start-up didn’t succeed.  I’ve also met a handful of very successful entrepreneurs.  While it is true that they exhibit quite a lot of the qualities generally subscribed to entrepreneurs, I personally think that success requires much broader support than simply the personal qualities of the entrepreneur.  (Not to mention that any tight cohort most likely exhibits similar qualities.  That’s why they are a cohort.  Let’s not confuse shared experience with success.  While most squirrels in my neighborhood are brown, simply being a brown animal doesn’t make you a squirrel.)

So my personal “scorecard” for initial evaluation or entrepreneurs includes both personal factors and opportunity factors.  I typically look at four factors in each category.  What follows is a quick overview of my though process in an initial meeting with an entrepreneur.

Personal factors

There’s an old cliche in the investment community that they would rather invest in “an A team with a B product, then a B team with an A product.”  This speaks to the importance of the people involved in any start-up, and truly I tend to judge the entrepreneur before I judge the idea.  Following are the four factors that weigh heavily in my evaluation of the personal side of the entrepreneurship equation.

Passion and Commitment

Just about every article you read on entrepreneurial qualities talks about passion and commitment being critical for success and I couldn’t agree more.  Building a successful business is hard enough with passion fueling complete focus and commitment to keep going when the going gets tough.  Whenever I meet a new entrepreneur I’m constantly looking for signals that tell me their force is strong.   Things like working evenings and weekends on their startup while they work a full time job speak to passion; and investing personal money or not being dismayed by a couple failures tells me a lot about their commitment.

“Inner Circle” support

The first few years of a startup tend to require almost exclusive focus and commitment.  This can be very hard on family and friends.  Many an entrepreneur I’ve talked to has spoken of past divorces due to their focus on the business.  Work/life balance is hard enough when you’re an early stage entrepreneur.  If you try to do it without having a real-world conversation with your spouse, family and close friends, you’re asking for trouble.  I will specifically ask questions of entrepreneurs in this area – not only have they had the conversation, but is their family behind them.  Having the most important people in your life in full support of the crazy ride you’re embarking on can be a tremendous help.  Just remember, it IS possible to be successful and stay married.

Realism

I’m also on the lookout in those first meetings to get a sense of the entrepreneur’s sense of reality when it comes to starting a new business.  Are they aware of their risks and chance of success?  Have they overestimated the potential of the business?  Have they underestimated their capital and resource needs?  An entrepreneur with a clear head and sense of the risks, and rewards, of their start-up shows me they’ve done their homework.  The entrepreneur’s realistic approach helps shield them from disappointment and provides a sound basis for business planning.

Ownership

Finally, on my scorecard, it’s highly important that the entrepreneur demonstrates ownership for their own success.  Too often I have entrepreneurs in my office that think it’s my job to find them money or get them started.  Any entrepreneur who demonstrates in any way a mindset that their success is dependent on the actions of other presents a huge red flag and is a topic I will immediately address.  If I challenge an entrepreneur on this topic and they become defensive or angry, and I don’t believe they can be coached out of their beliefs, I wish them well and send them on their way.  In my corner of the world there are all kinds of support resources for entrepreneurs of all shapes and sizes to tap into, but your start-up’s success is no one’s responsibility but your own.

Opportunity factors

Even an A team needs something to sell, and when I say “opportunity” I mean the product, service or concept the entrepreneur has at the core of the start-up.   Opportunity factors, for me at least, get weighted differently than personal factors.  First – as I said above, the personal factors are always important and almost always where I started asking questions first.  Second – the nature of the opportunity impacts how deep I need to dive and how critical it is to success; the discussion is much different if I’m talking to someone opening a pizza shop versus a medical device start-up.  The questions below speak primarily to the bulk of my current clients: high-growth potential start-ups in the technology space.

Something that’s real

I talk to lots of technologists with plenty of exciting ideas.  However, there is a big difference between an idea and showing that idea works.  Whether it’s a prototype, or a pilot, or lab research, the entrepreneur that can prove, even if it’s on a small scale, that the technology works is light years ahead of anyone with simply an idea or research.  Of course, the challenges don’t end there and the next hurdle is to show the technology can scale into commercialization, but if you are technology start-up and you have a meeting with a potential investor, be prepared to answer this simple question: “Does the technology work?”

Market need, and a way to get there

We all have our personal cliches and one of mine is “not every good idea is a great business.”  A crucial part of any evaluation I have with an entrepreneur is understanding why someone will take a dollar out of their wallet and give it to the entrepreneur for their product/service.  This is critical and I can’t count the number of entrepreneurs that either aren’t focused on sales or underestimate the effort involved in selling.  You simply must be able to tell me (and more importantly your future customers) why they should buy your product.  The more compelling the argument, the better.

The “way to get there” is equally important and speaks to how the entrepreneur intends to get the word out.  Almost as hard as getting a customer to take a dollar out of their wallet, is getting the opportunity to try to convince them to take that dollar out.  So I look for what the entrepreneur’s plan is to get in front of potential customers.

Team that can deliver

Team, team, team – I can’t say it enough.  Once I’m done evaluating the founding entrepreneur(s), the other team element is to look at their support team.  The basic service team (legal, financial, etc) is not so important in my mind as their advisory board, if they have put one in place.  Most people think of the value of an advisory board as the coaching and mentoring they can provide and certainly that is invaluable, but more so to first time entrepreneurs.  The real value in my eyes though of the advisory board (or “real” Board, if they are that far along) are the technical and sales contacts they can provide.  To an investor, this lowers risk by providing not only high-level introductions, but an accompanying “instant credibility” that helps make those early sales more likely.

That said – I don’t want to overplay the board of advisor, nor understate the founders.  The people running the company on a day to day basis still have the greatest impact on it’s chances for success and a high level of scrutiny is given to that person or team.  I’ve had many a “tough love” conversation challenging an entrepreneur to convince me they have what it takes to start, run and grow a company.

Profitability

You would be amazed at the number of pitches I hear where the entrepreneur doesn’t tell me how they are going to make money.  Not how much money, or how big the company will be in five years – simply no information on where revenue comes from.  Sometimes these are presentations to reviews committees I sit on for 5 – 6 figure loan/grant funds.  So before I go any further, entrepreneurs please get out your checklists and add “Tell them how my company makes money” to your pitch list.

When you do tell me how you are going to make money, I’m looking for a well-reasoned approach that fits your market and your sector.  If you are proposing a revenue model new to the market, then walk me through why you are passionate about the new approach and convince me that your customers will positively respond.

Hand in hand with how you make money is how much of you get to keep as profit, so a basic understanding of your financials and operational costs is part of this analysis.  Investors will probably be categorizing your business model and I admit I’m no different (high-value; commodity; up-sell potential, etc.).  This leads into what most folks call “scalability”, or now that you have a handful of customers and you’re hopefully making money, how do you make a lot of money?  So for profitability, you need to tell me two things: first, how you make money then second, how you intend to make a lot of money.

Your thoughts?

So that’s my scorecard, what do you think?  It’s not intended to be anything other than an initial vetting tool as obviously deeper information is needed to truly judge the potential of any start-up.  However, as a tool to evaluate early stage entrepreneurs and their businesses it has served me well and I can tell you that many of these areas are also important to my peers.

Entrepreneurs – how do you fare against this scorecard?

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