Hot startups — how to make yours one of them

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Suppose there are two startups with similar products and other characteristics. But one raises $50m in investments while the other struggles to get noticed. What differentiators led investors to choose one over the other? As someone on the investor side of this equation, I will give you insight into 7 key things that attract me to a startup.

Awareness

Generating awareness about your startup is important for two big reasons. First, it’s impossible to sell a company for hundreds of million dollars if nobody has ever heard about it. Second, if investors are intrigued by your pitch, they will look for independent online references to your company.

There are different ways to make the market aware of your startup, from PR to creating entries in Crunchbase, Wikipedia, AngelList, LinkedIn, and other public forums. Your can do it from anywhere in the world. But be aware that the task will require your constant input, even if you hire a PR agency or specialist.

To me, generating awareness is not about sending press releases or doing a blog, but more about creating meaningful content that spreads organically through various channels. The media is interested in three things: scandals, numbers and hot news. It’s very hard to count on being hot news, since not everything that looks hot to you is hot for the media. But you can always play on numbers, for example, by providing the media with survey results for your industry.

The story behind the startup

Venture success is not about money or an idea, but about a founder being a strong, patient and motivated fighter. If an idea doesn’t work out, you can get a new one, but if a founder gives up, the business collapses. Leo Tolstoy once said that one ought to write only when one can’t live without writing. It’s the same thing here. I look for founders who started their businesses because that is the only way for them to live their lives.

Startup founders have a greater failure rate than any other professionals. You have a better chance of being noticed waiting tables in Hollywood and making it as a movie star than you have of creating a successful startup in Silicon Valley. Nobody who is motivated only by financial success can survive; unfortunately, founders typically break down at about the two-year mark, even though success usually takes longer.

As a founder, you need to convince investors that you do not give up easily by telling your story, sharing your motivation, and supporting your works with non-verbal signs and behavior. Some founders, especially those who come from other cultures, are reluctant to share personal details, but investors in the US can take that reticence as a sign that something is wrong. You need a strong story around your startup and yourself as the founder.

Name dropping

Once you have generated buzz around your startup and formulated a great story, the next big thing is name dropping — referring to somebody famous or borrowing the reputation of a well-known and respected person for the success of your startup.

One of the startups that I invested in produces artificial diamonds. The team engaged Leonardo DiCaprio as their advisor. DiCaprio is very vocal about artificial diamonds because they are better than blood diamonds from Africa.

If you can get an advisor like DiCaprio, you probably don’t need to worry about the rest. But you probably can’t, so you need to build a network of advisors. A good way to do it is by building increasing larger circles. Start with people who are close and easier to get: lawyers, market experts, and friends of friends. By investing their time and name in your startup, advisors also become investors. This type of engagement normally doesn’t require founders to give away a stake, or at least not much of a stake (usually 0.25% — 1.5%).

Having prominent advisers on board demonstrates that you are capable of selling your idea. If you can’t sell your business proposition to advisors, it doesn’t make any sense to try to sell it to investors. About 60% of startups die somewhere in this stage.

Shuttle diplomacy

If your startup makes it through the previous stages, it’s time for shuttle diplomacy — using the mild interest of one investor as leverage when talking to other investors. For instance, a couple of times I was interested in a company but not completely sure I wanted to invest. I gave them a term sheet for my investment, with the condition that I would execute on it only if they raised money from other investors as well. Having my term sheet helped them raise that money because it provided a very good indication to the market about what was happening with the company. However, shuttle diplomacy can backfire if it is not done right, because investors talk to each other. Otherwise, it works very well.

Sense of urgency

Once you start talking to investors, you have to raise the money. You can’t pull back for a while if things don’t go your way, because investors will just say “Oh, I know this company; it has been on the market for six months already.” Poof! Your startup is dead!

That’s why founders need a sense of urgency to make sure that investors get excited about them. Don’t let investors postpone the deal. Make the urgency clear: A funding round is closing, or your startup is signing a deal with a client that will impact the valuation, or some other compelling event is occurring — but resist the urge to lie. PR can raise the heat level on the market as well; for instance, you might mention to a good media source that you are closing a round.

Memorable founders

The last element may seem strange, but it works well. Successful founders tend to have a specific unique feature that they are remembered for, such as the way they behave, speak, or dress.

Maybe it’s not fair, but after talking to 50 startup founders a week, I will most likely continue the conversation with the person with the weird hair and an interesting AI idea, rather than somebody who was less memorable. And I’m not alone; I know investors who invested $3m in a startup because the founder swore to wear a bow tie every day until the day he sells the company for $1b. This commitment, though complete nonsense, convinced the investors of the founder’s determination.

Taking the risk of being unique shows that you are open-minded, ready for experiments, not afraid of risk, not afraid to look stupid, and not afraid to fail — all characteristics of a successful founder worthy of an investor’s time and money. So think about what your memorable feature will be. Something you’re hiding or ashamed of could be the thing that makes investors remember you.

Local presence

I do not recommend coming to Silicon Valley to do fundraising unless you are planning to have a local presence there. This may be the first and only question investors ask.

Startups with a local presence have better chances with investors because they can be sold more easily. When a large corporation starts looking for a certain technology, they’ll look at local startups first, since the due diligence will be quicker and there will be no risk in terms of intellectual property rights. Even if the technology is not so great, it is much easier for a corporation to pay $50m for a company in the Valley than $5m for a company in Turkey, Egypt, or Russia.

The best strategy is to come to the Valley for business development, secure a good partnership deal or “sell” your product or services to a local startup, and then ask the partner or the startup founders to recommend you to the investors they work with. It may sound like the long way to go, but in reality, it is much shorter and more productive than just sending emails to top capital firms. For investors, it is also a good way to verify that founders have at least some local presence and are capable of developing their business in the US.

Taking the time to make sure your startup has all 7 of these key ingredients can really pay off. As investors scan the landscape for promising new businesses, yours will stand out as a hot prospect, and you’ll be ready to make a pitch that leads to the funding you need to quickly grow your idea into a successful business.

By Pavel Cherkashin, managing partner at Mindrock Capital

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