Raising the first investment for a startup is just a small drop in the ocean of challenges. Next are coming days and weeks of challenging discussions between founders and investors to come up with the best strategy. How startups should cooperate with the investors?; what should founders consider when choosing the right mentor? This week we had the opportunity to interview Mario Navarro, Entrepreneur & Investor at Demium. Mario helps startups and investors to cooperate and create successful products. In this interview, Mario shares his answers to frequently asked questions related to the partnership between founders and investors and added some tips for startups about how they should perform with the maximum profit.
Can you tell us a bit about yourself and what you do?
Back in 2013, I started an on-demand delivery business called the Jinn in the United Kingdom. We grew the business to over 100 employees; over 5000 drivers deliver over a million orders. In the UK, we have raised over 20 million dollars in venture capital money. That’s where I got my first experience with the investors but from the other side as a founder. And after that, in 2017, we sold the assets to the logistics group called Recall Logistics to continue the business. I didn’t return to Spain, where I’m originally from, in 2018, then I joined Demium. I have been in Demium for 2,5 years now. In Demium I have been involved in the investment side, this implied deciding some of the investments that we’ve done and the portfolio side means helping the portfolio companies we have. Continue to progress and continue to do well. So being very involved with the founders at the earliest stage.
Do you focus on Pre-Revenue or Post-Revenue Startups?
Demium is actually quite unique in the sense that we create companies from zero. So it’s not only pre-revenue, it’s actually pre-team and pre-idea. What we basically do in Demium is to integrate founders and find people who would like to get amazing business opportunities. Once we have found these people, we assist them to find a co-founder and find an experienced individual who can follow them all through their journey to create a great business. In addition, we support them to find and validate ideas or business opportunities. So what we do is we go from the pre-teams and pre-idea stage in which we helped co-founders meet and find ideas. We invest in the best businesses that are coming out of this incubation program. Then we stay with them towards the entire journey. So we do make a decision to invest or not, but the first decision that we make is whether to get talent or not inside our program. We stay with them to work on the entire journey. So, we look at the specific founders, and once they are inside our program, we decide to invest or not. Typically that decision to invest is made pre-revenue.
Do you think it’s meaningful to have investors on board who are experts in startups, or do you just need someone who can provide you cash injection?
It’s enough to have the necessary experts in startups. But what I would suggest to any founder is to make sure the investor is aligned with their business vision and agenda. For instance, if you want to create something for the long-term, you want to create a business for the next 20-30 years. Don’t get an investor on board that wants to cash out in 2 years or otherwise that he will generate problems down the line. So, I would always suggest that they make sure they are interested in starting a line. The best way to understand this is to see whether the investor has experience of investing in startups. That’s not necessarily meaning that he is an expert on startups, but he understands how it works. In some countries in Europe, we see that compared to the US, for example, this includes some other more established markets like the UK. In countries like Spain, Ukraine, Poland, etc. Many investors are just coming to the market that is interested in startups, but that hasn’t made a lot of investments before. That’s where we need to be careful to make sure the interests are aligned. So I would suggest founders do quotes ideally for the investors that have some track records or to be the investors that have been founders themselves. Even if they are coming to the market for the first time, they understand how the dynamics work.
Is there a perfect founding team for you?
“Perfect” is a very strong word. I think that they are all great founding teams absolutely. But one of the important things we’re looking out at the teams and founders together is to make sure that everyone understands their roles. Not only at the specific moment that you’re making the investment but also in the future. Making it very clear for both founders. Because if the roles are not clearly defined, it may lead to the creation of friction down the line, and he’s one reason why some teams can’t fall apart. Now, if you have teams where someone has a role, understands that role, and has some very specific functions. For example, you have a founder that has experienced building a team, building a business, and raising capital. He’s going to do that part of the business. you may also have another founder who has experience in the technical aspect, that has been leading teams of engineers and created outstanding products. That would be a great combination where you have business skills and technical skills combined together. When I look at the founding team, I want to see a very specific set of skills divided, and roles are divided not only in the present but also for the future.
Are there any particular ratios or KPIs you focus on or other metrics you look at when deciding on an investment?
Of Course, first of all, we decide whether to incorporate talent into your incubator or not. That decision is obviously not made of metrics but really on the founders themselves. In that case, we are not only looking at the experience but really looking at the passion that they have at that specific time and really what you want to build for the future. We do want to see some skills even if they are young, what they have done previously that could suggest that they can repeatedly do that in the future. But obviously, at that point, we check on the founders. Once the founders join the incubator and start building an idea, we typically make an investment decision within the next few months. And at that specific stage, once we make an investment decision, we want to look at the first users. We don’t want a startup, for example, to have hundreds and hundreds of initial customers, but then not a lot of engagement. I want to see that you managed to find a niche, and that niche is responding with passion to the solution you build. If we’re seeing a great retention rate to use from some initial customers. That is a great indicator that you’re building something that makes sense. Rather than thousands of installs but no engagements or no recurrence of those installed. So we prefer to have smaller initial users or smaller installs, visits to a website, etc., but a lot of engagement to build a solution for the target niche.
What is more essential for you to either have pure growth potential or a solid business model? Is there one that holds more weight than the other?
It’s difficult to choose because you need both a good business model and pure growth potential. If I had to choose, I would say pure growth potential just because a great business model by itself is not necessarily something for an idea. You can build a good lifestyle business, such as an e-commerce website from your house. Which sells something you like to a limited target audience and still makes a decent amount of money. But it’s not something that is going to be from the investor and venture capital perspective. You do need to show growth potential if you’re investing in the venture. But honestly, we wouldn’t invest in a business that has that fuel growth potential and doesn’t have a road map to a solid business. We want to have a clear path towards generating profitability in the future.
The next question is about due diligence. How long should the due diligence take as an investor? What do you look for, what are the biggest red flags?
Due diligence depends on the business stage. Basically, when business is very early, your bedding is mostly on the founder. So let’s say. As long as he takes you to believe in that person, I made the commitment that can be a couple of weeks up to months to trust that person. To build that trust, you just build that trust before, and it can’t be a matter of days, right? You know that founder previously and you build a relationship with that founder. He tells you how he wants to build a vision in one call, then you can call and say, okay, go ahead at the very very early stage. As the business starts to evolve, mature, and go through later stages. Of course, due diligence becomes more important for ones who understand more about the KPIs, the data, and what’s driving all the business decisions. But, therefore, it takes longer, right. When you are looking at series A and series B, it takes at least a month because you are going through the metrics, but you also want to talk to the team, I think it’s very important. One of the greatest skills that we look for in a founder is attracting the right people. Because that’s going to be really one of the most determining factors in the business’s success. so we want to meet the team, not only the founders but meet the whole team. Understand if they’re there for the long term and if the founders can attract a great team. That plays well in due diligence. Some of the red flags, for example, would be a very high turn of the team. That would be a red flag for us when we’re doing due diligence. And of course, any things that don’t match if you’re telling us about some tech, or some KPIs, but we dig deeper and figure out that’s not really that way. We prefer transparency when talking. I’m a big opponent of transparency when both investors and founders just tell things like they are, making everything much easier.
And from the founders’ side when vetting the investor? Is there something that founders should look at to make due diligence?
Actually, founders have it easier when doing due diligence on the investor. Because basically, the investor has a larger track record of the investment that founders have on building something. Instead of the founder for whom it might be the first company, and so it’s hard for you to get references. However, the investor typically has a previous track record. The founder can communicate to the company that this investor has previously invested and understand whether the investor could be helpful or not. So I think that it’s easier for the founder to do that due diligence and a lot of the time, I think they should. It is a partnership for the long-term when you look for venture capital. Capital returns can take 8-12 years to happen. That means the founder has a new investor when working together in one way or another for a very long time. I would suggest founders be on board to understand how they’re getting on board with investors to make those calls.
How frequently do you think a founder should communicate with their investors? Conversely, how much time should an investor dedicate to a startup post-investment?
On a monthly basis would be the minimum to check the amount of updates on how the business is going. That helps both sides; one side, the founder who, at least on a monthly basis, has taken a deep view and has an overview of how things are going. So I think that putting the email to just observe will be enough for the founder and investors. They can get started to you on how the investment is going. That would be a minimum. In terms of the relationships with the investor and the founder, apart from those monthly updates. I think that the investor shouldn’t ask the founders a lot about the company and business. When founders are building a company they’re managing a ton of different things. They need to dedicate a lot of time to investors instead of dedicating more time to clients or hiring some more people, etc. Investors should understand that. When they’re asking for a lot of information they have to be willing to help with suggestions and support with the specific need, but not only communicating on a monthly basis with the founders. It can definitely be good to have more conversations with the investors, but it really depends on whether your investment is able to bring real value. I’d suggest investors not to ask a lot of questions if they’re unable to give anything in return.