Start-up Entrepreneurs' Blog

Entrepreneurs: Don’t Make This Mistake, Why I Didn’t Invest in a Start-up

March 29, 2011

I ran into a technology start-up about a year ago. I loved the technology. It had come out of a university.  I thought it had a lot of potential to solve a mounting problem on the Internet. The founder was very knowledgeable about the technology and had even done previous start-ups. So when I was asked to invest, why did I pass when I thought the technology was so promising and the company could go somewhere?

Too little business of technology, too much science

First, the founder had assembled a group of advisors, all of which were technical, none on the business side.  The business plan read like a dissertation. I hadn’t seen so many mathematical algorithms and equations since graduate school. The business plan focused on the technology. Why it worked and how it was better than the technology currently used to solve the problem on the Internet. 

The business aspects of the plan were missing or weak at best. They didn’t research the numbers. They were fiction, one of those start-ups meant to look good in a spreadsheet. The business model was one of selling advertising space and no one had bothered to contact anyone with a background in this area to see if the numbers made sense. The revenue numbers were overly exaggerated. By the third year of operation, they projected tens of millions of dollars of revenue per employee. This truly would be a spectacular feat.

Too complicated of a company

Second, the company was small and was composed of technical staff and a finance person. This was a seed stage start-up funded by the founder. The CFO created this complicated company structure. A parent company would own all the intellectual property and patents and then a series of application companies would have a perpetual license to use the patents.

Since the technology was general and could be applied to many different markets and applications, the strategy was to build separate companies to address each of these different markets. Sounds good, but these were markets where the technology could be applied and they weren’t solving problems in these markets.  They were looking for investors who would invest in the parent company and a different set of investors to invest in the application companies. Most investors I know want to own the IP and patents at the application start-ups. This just sounded like a headache.

No purposeful or focused progress

Third, they have asked me to review their plans and changes over the year and I just don’t see any forward progress.  I see a lot of conjecturing, but no tangible work.  I hear about the lofty long-term goals, but I don’t see any plans or intermediate milestones today, no purposefully or focused activity. The start-up works on the technology. But when I ask what customer meetings they’ve had and what marketing efforts they’ve put forth … nothing. They don’t seem to be aggressive pursuing the business, and only half-heartedly do they continue to develop the technology. Why? Because they tell me they are waiting for an investor to put millions into the company so they can push forward. It just brings to mind a fish floundering on the shore, trying to make its way to the ocean.

But still … my heart and mind were divided on this start-up for over the year. I still love the technology. I think it’s great. I just don’t see the everything else that is needed to make it a business. I am seeing more and more start-ups addressing the same Internet area and they have delayed so long that I believe they may have missed the window of opportunity. In the end, it’s the team and how the project is unfolding that is making me walk away.  An interesting tidbit is the entrepreneur never saked me why I didn’t invest (I’m a blunt person, I don’t have an issue with telling someone the truth).

Filed under: Start Up Funding

Tags: entrepreneur, investor funding, investor rejection, Start Up Funding