Stepping into the mind of Louisiana Startup Prize investors

[Editor’s Note: Due to the rules and regulations of the Louisiana Startup Prize, the identity of investors involved in the prize are to remain anonymous.]

As the Louisiana Startup Prize kicked off last month and competitors home in on business plans, investors are beginning to take an interest and look out for businesses to back. The next qualifying event is May 29-31 and to get a different perspective, The Forum sat down with two Louisiana Startup Prize investors for an exclusive interview.

Q: At the qualifying events what type of businesses attract you? Do you look for unique ideas or industry ideas with a twist?

Investor 1: We look for startup opportunities in industries that we know and understand. This allows us to not only make better investment decisions but also enables us to be better advisers and mentors to any companies in which we invest. We look for startup organizations that have the potential to grow into large and profitable organizations. Thus, the markets for the products or services being considered must be sizable, and the company must exhibit a competitive advantage which will allow the new company to gain significant market share at prices which allow the company to maintain attractive net margins.

Investor 2: I am looking for management that has the skill and insight to find or create a business opportunity and then exploit it profitably. I am not looking for small returns, given the risk inherent in all startups. So, in general, I am not attracted to insignificant opportunities, but to significant opportunities, such as disruptive technologies.

Q: What type of startup owners attract you to want to invest? Are there any specific qualities that you look for in an entrepreneur?

Investor 1: We look for entrepreneurial management teams who not only understand the products or services around which their company is being built, but also understand how to build and grow a profitable enterprise. Also, a successful entrepreneurial management team must exhibit both passion and persistence – growing a successful business is both challenging and time consuming. Finally, we are looking for a management team that will treat investors honestly and fairly and does not have an inflated view of the value of a fledgling idea or concept.

Q: How do you know when a startup is a good investment for you?

Investor 1: You never ‘know’ that a startup will be a good investment. You do your best to understand the risk and opportunities associated with a given investment, and you place your capital with the opportunities which appear to have the best balance of risk and reward. Passion is important for the investor, too; nobody wants to place money with a project that is not interesting, exciting or a benefit to society.

Investor 2: Only after it reaches profitability, or after it is sold or goes public at a huge profit. Until then, which could be decades, I consider my investment to be worthless.

Q: Plenty of startups with great ideas shoot for winning the ultimate startup prize. How do you weed out the businesses that you aren’t interested in?

Investor 1: We are looking for startup opportunities that have the ability to grow into sizable companies capable of generating at least several million in revenue with an attractive profit margin. While revenue is important, profit is what really matters. If a startup opportunity is targeting only a small niche market or if the entrepreneur is focused only on revenue and not on profit, then we are not interested.

Investor 2: The company’s business plan has to be reasonable and achievable with the correct entrepreneur to make it happen.

Q: When listening to an entrepreneur pitch their business, do you look for any red flags, if so what are they?

Investor 1: We are not interested in investing with entrepreneurs who do not have a sound understanding of their business’ products, customers, suppliers, competitors, internal cost structure, pricing dynamics and organizational strengths and weaknesses. In addition, an unfair valuation model in which the entrepreneur is asking for too much money for too little equity also causes us to pause. And finally, an egotistical entrepreneur who prefers to use the term ‘I’ instead of ‘we,’ generates a red flag for us.

Investor 2: Lack of vision and lack of ability to achieve a vision; preparedness. The entrepreneur has to have thought out how to get to the ultimate goal. I am put-off by a half-baked idea. So he or she must have explored the market in which the company will compete – its size, how much of the market share the company can reasonably expect to capture, how long will that take, with how much capital. He or she must know if the technology is patentable and proprietary, if it works, who the competitors are, and such issues. Show me you know what you are talking about. I know some ideas are in their infancy, but the more you have prepared, the more skilled you will appear.

Q: When you speak with startup owners, how can you tell if their business is risky or safe?

Investor 1: All startups are risky; none are safe. However, some are more risky than others. Business risk can be reduced by: an experienced, wellrounded management team; a unique, patented product; a low-cost structure and associated pricing advantage Investor 2: It is all risky. Anyone who is investing in a startup who does not understand that only about three percent of startups ever survive to become profitable should not be investing in startups. Stick to bonds. If a business if ‘safe,’ the investment should be priced accordingly, and the investor should not get much for the low risk.

Q: Do you like investing in a risk? Why or why not?

Investor 1: No, we do not like investing in a risk! People who like investing in risk are either thrill-seekers or compulsive gamblers; they are not investors. However, typically a project that exhibits a high degree of risk has the potential to yield a higher return. Thus, we aspire to invest in opportunities that appear risky from the outside, but upon gaining greater understanding and insight, are not as risky as they first seem. While most startup companies are risky, when a startup management team has a deep understanding of their products, suppliers, customers, competitors, pricing and internal cost structure, their startup company may not be as risky as it first appears – especially when an ownership position in the company can be achieved at a reasonable price.

Investor 2: There is definitely an element of the thrill of gambling or playing the Lotto. You can take a small part of your portfolio and shoot for the stars, but with a high probability that the house will take your money. But, again, it should be a bit better than that. Entrepreneurial investing should involve a judgment that the potential rewards make the risk worth it. And you should never invest what you cannot afford to lose. Basically, play with ‘house money.’

Q: Give us three rules startups should live by.

Investor 1: Do your homework. Develop a deep understanding of your products, suppliers, customers, competitors, pricing and internal cost structure – both today and into the future.

Be fair to your investors. In most cases, your company would not exist if not for the risk capital provided by your investors. Treat your investors honestly and fairly; communicate often and openly; aspire to minimize their risk and maximize their return. The Golden Rule applies to investing too – treat others as you would like to be treated yourself!

Maintain your passion. Building a company from scratch is hard work and very risky. If you are not passionate about your project, you may be better off pursuing a more traditional career path.

Investor 2: Be realistic. Be better prepared than your competition. Have a high pain tolerance.

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