Selection criteria for startups - Part one
Discover the process we use at SeedBlink to take on a startup seeking funding in a way that maximizes its chances of success.
Editorial written by Ionuț Pătrăhău, Managing Partner & Corporate Development @ SeedBlink. In addition to his vast experience in banking, Ionuț Pătrăhău also worked in the medical services field, being former CEO of the private health network Regina Maria and co-founder of the Brain Institute, a neurosurgery center developed in partnership with the Monza Hospital.
In the last decades, an economic phenomenon has been described and analyzed in numerous studies and books, which I refer to as "Business Paranoia". This phenomenon means, in short, that your success determines a proportional desire of the people around you to have a piece of it. Andrew Grove, the CEO of Intel, explained it best in his book, Only The Paranoid Survive. But the speed at which strategies are accelerating in our time leaves any possible "copycat" behind.
We are often asked about the recipe for our success or the things that could go wrong in the future, but mostly the press is interested in the process we use at SeedBlink to take on a startup seeking funding in a way that maximizes its chances of success.
The evaluation of a startup begins with the tool Seed Rating, which attempts to objectify as much as possible the stage of preparation for funding that a startup is in at any given time. If the score achieved in this first stage is promising, the startup moves on to the Funding Committee, where there is a checklist of items that startups should tick off at the end of the assessment. However, realistically, these tools and checklists do not contribute more than 30% to the overall assessment of a startup's quality or its chances of success in the future. This is because both the "quality" and "chances" of a startup succeeding in the future are extremely relative.
We can compare managing expectations for a startup to managing risk in the banking sector. Although banks have increasingly sophisticated means of assessing different categories of risk, they finance less than 20% of their corporate customers, of which only about 5% become non-performing loans. Let us not forget that banks are funding mature companies that are, in principle, operationally profitable, even if a large portion of the loans are secured by real estate.
Therefore, all our "curation" tools - important as they may be - are by no means automatic criteria for assessing future success. So what are the key points we have in mind?
Each team member has their own criteria, depending on their basic specialization. While one may be well-versed in organizational culture and the psychology of team dynamics, another may be a specialist in strategic marketing, international expansion management, accelerated scaling, organizational structures, or financial estimates and budgets. Each of us has our own value system by which we categorize startups, our own perspective from which we view and evaluate the various components, and our own philosophy regarding the importance of one criterion or another.
All in all, the main competitive advantage of a financial institution lies in the accumulated experience of the members of the investment committees and in their ability to understand the points of view of others and to accept the diversity of opinions that coagulate into a general opinion about a particular startup.
I know this is not helpful to those looking for a valuation recipe, but it is the truth in my opinion. It is not uncommon for a colleague's opinion to be so well documented and consistent that the committee ended up "against" it, even though everyone else tended to be "for" it.
In a nutshell, experience and specialization are built after thousands of evaluated companies, with many errors, with even more doubts, with hundreds of "reluctantly agreed" and "enthusiastically agreed", or "requires more preparation" and "improvements needed".
The diverse composition of those who give their opinions is the solution to success and strategic coherence. The key to the evaluation is not only in the grade received at the end, but also in the follow-up that the start-up company receives and in the way it makes use of valid opinions in its business.
The editorial will continue with the main reasons why startups fail most of the time. Although the world of startups is anything but a science, there is a structure without which every success is but the result of luck in a lottery.
By Ionut Patrahau
PublishedAugust 23, 2021