Advances in technology have made the start-up world more accessible than ever before—but not all of the people launching businesses are “the real deal”.

by Karin O’Connor

About six months ago, we started posing a simple question to many of the CEOs we meet—at companies both early- and growth-stage:  “If you were at a cocktail party and a stranger asked, ‘what do you do’, how would you answer?”  Here are a few of the responses:

• “Our team is tackling big challenges that are keeping home robotics products from being truly useful.  Our next-gen robots will be able to help with tasks far more complex than vacuuming a room.”

• “Our company creates home organization products that combine high design and functionality and sells them at affordable prices to middle-income consumers via both brick-and-mortar and e-commerce channels.”
• “I’m a technology entrepreneur and am pitching to VCs for Series A funding.”
• “I co-founded a software company and am working out of XYZ (cool) co-working space.”

Pretty revealing, don’t you think?  The first two statements focus on a market, a pain point, and how the speaker and his/her team are addressing their customers’ pain in a unique way.  The second two focus on the speaker’s personal status and/or investor/tech community relationships.  Clearly, if we had to choose which of these companies to invest in based on these statements alone, it would be the first two—the ones with true entrepreneurs at the helms—hands down.

It’s pretty obvious that the start-up scene is exploding—think TV shows like “Shark Tank” and “Silicon Valley” and the myriad accelerator programs, co-working spaces, crowdfunding portals and angel investor groups that continue to spring up in cities large and small. Thanks to advances like cloud computing, open source code, and social media, it costs far less to start a company today than at any time in history.  A 2012 Forbes article pegged the cost of getting a software company from concept to product launch at $600 K in 2007—but at only $50 K just five years later.  And it’s no doubt fallen further since.

This is exciting stuff, since it means that many more ideas get to see the light of day.  In fact, Morgan Bender, Benedict Evans and Scott Kupor of venture capital firm Andreessen Horowitz recently reckoned that seven times more companies are raising “seed stage” rounds of between $1 MM and $2 MM today than ten years ago.

But how many of the folks who are launching these start-ups are true entrepreneurs, obsessed with solving a problem and with the endurance, scrappiness, and sheer guts to ride out the storms that will inevitably come their way–and how many are just smart people with good ideas who are happy to give it a go as long as they can get some funding, have a good time participating in a cool community, and still manage a balanced lifestyle?  For investors, this is a key question:  If you invest in a team that sees walking away as a real option, you can easily lose all of your money while your founders take away a nice resume entry and solid job prospects. With all the risks that investing in start-ups entails by its very nature—e.g. market risk, product risk, competitive pressures—it’s critical to choose the right partners up-front.

So, how can one tell “who is who”?  There’s no sure-fire way, of course, but here are a few things we’ve learned to watch out for:

• Spending more time in the “tech community” than in customer markets.  Incubators and co-working spaces are great, but they and their programming can easily become a distraction.  So can a focus on getting coverage in the “tech press”—is this about driving customer awareness and traffic, or just building status among peers?
• Claiming success before it’s actually realized.  Winning an “up-and-comer” award or closing a funding round may be steps along the way, but it’s building a profitable company or executing a lucrative exit that really matter.
• An over-focus on current compensation levels.  Entrepreneurs are supposed to have “skin in the game” and be working towards the upside.  If current comp is that important, they should go ahead and take that corporate job.
• Too much fundraising and socializing with investors.  Angel investors like to be around start-up entrepreneurs—that is a large part of the appeal.  But this attention can divert time and focus away from actually building the business.
• Statements like “If I don’t raise $XXX by September, I’m going to wind the company down.”  Everyone understands that smart, educated people have options, but this is the equivalent of holding a gun to an investor’s head; no one should be writing a check into that situation.

At Perimeter Advisors, we have been honored to work with many terrific entrepreneurs—smart, scrappy, and resourceful, even in the face of big (often multiple and sometimes simultaneous) challenges. Some of you are reading this and know who you are!  But we’ve also been burned a few times by folks who were just as smart and were visionary enough to put together a compelling game plan, only to walk away when the going got rough.  The start-up world is, without a doubt, cool and fun, but building a valuable enterprise is also really hard.  Almost every successful company we’ve seen has been through at least one near-death experience to get to that point—and that’s just not something most people are willing to work through.  Choosing your partners wisely up front, and with this in mind, just makes common sense!

We’d love to hear your thoughts on this topic—feel free to give us a shout.