Startup Advice: How Entrepeneurs Gain Credibility

While talking with young founders in Europe and the US over the last couple months, I have been asked the same question repeatedly -- how can an entrepreneur just starting out gain the necessary credibility to attract capital? It is an important question because, at its heart, a startup investment is an investment in the entrepreneur. And the earlier stage the investment, the more so this is true.

We all know the allure of the elusive "serial entrepreneur" -- the rare breed who has done it before (successfully) and will not fall victim to the same business pitfalls (he'll have to discover new ones). I have backed serial entrepreneurs before and will continue to back them. They have valuable startup knowledge to bring to bear on the company building process that we in the venture business clearly covet. But I have also backed first time entrepreneurs, sometimes just out of school. I did not back their extensive startup knowledge. I did not back their record of success. In many cases, I did not even back their domain expertise. In fact, some of the very best entrepreneurs with whom I have worked lacked any of the standard indicia of success that a venture investor might look for in a successful founder.

So how does an entrepreneur with little or no track record gain credibility? In my experience, they gain credibility in two ways -- they borrow it and they demonstrate it. Borrowed credibility runs on the same principle as guilt by association. If entrepreneurs surround themselves with people who have credibility, they gain credibility themselves. In the business world, reputations are paramount. As a result, when well-respected individuals vouch for an up-and-comer, it is meaningful. There are lots of ways someone can vouch for you as an entrepreneur. They can provide services to your company (awesome lawyers, accountants, recruiters, etc. are in great demand -- if they work with your company it means they were willing to bet on your success). They can lend their name to the company as an official advisor (ideally you will be able to clearly explain how they are working with your company other than merely lending you their name). They can invest in the company (if industry experts or startup/product/marketing gurus invest in your company, it is a huge vote of confidence in what you are doing). They can go on your board (business leaders have no more valuable resource than their time, so if they go on your board it is a huge recommendation of you and your company).

When it comes to borrowed credibility, there is perhaps no more important act than the initial introduction you are given to an investor. If you have no track record and you cold call an investor, you have huge reputational obstacles to overcome. This is particularly true because many investors will assume that you were either unable to find someone to make the introduction or too naive to realize the importance of an introduction. Either way, your likely success as an entrepreneur will be sharply discounted. On the other hand, if you are introduced to an investor by someone he or she trusts and respects, you are well on your way to a trusted relationship yourself.

The other way first time entrepreneurs gain credibility is to earn it. I don't mean this in some sort of hazing way. There isn't a clear path to earning credibility. You don't produce a particular amount of diligence. You don't deliver a particular number of industry reports. You don't call or email to followup a particular number of times. What you need to do is be really smart and well informed about the business you are pursuing.

The best way to earn credibility with investors is to have good answers to the questions you are asked. At August we want to invest in people who know more about their business than we do. We want to be excited about what you're doing and get more excited as you thoughtfully answer questions about your business. That doesn't mean that you need to have all the answers. You don't. You just need to be thoughtful when you don't and explain 1) how you intend to get the answer, 2) what you predict the answer to be, based upon what you do know, and 3) how you expect to gain the answer over time. Domain experts are best positioned to answer questions about a domain specific business. But being a domain expert does not require direct experience in a particular business. It may be sufficient to borrow the knowledge of those who have worked in the industry. In fact, oftentimes the most interesting ideas come from people who are not mired in traditional ways of thinking about an industry but know everything there is to know about how things are done today.

Credibility also comes from doing what you say you are going to do. Sometimes that means following up on a question from a meeting (If you say you'll get back to an investor with an answer and you do so promptly, you'll gain credibility; if you don't, you are done). Sometimes that means hitting numbers you say you will, or closing on a customer you expect you will. I once gave a term sheet to an entrepreneur because he delivered on a number of assertions he'd made about his business at a meeting three months earlier. There's nothing better than an entrepreneur who delivers the goods.

If one of these techniques for garnering credibility is good, all of them together are great. Get introduced to an investor by someone he or she trusts. Build an advisory board and board of directors of industry experts and admired professionals. Do your homework -- know everything there is to know about the market you are pursuing. Welcome questions about your business -- answer them well when you know the answer and admit when you don't. And always do what you say you are going to do -- whether that is delivering promised followup materials or hitting your numbers. In combination, these techniques can give any entrepreneur, no matter how young and/or inexperienced, the credibility necessary to attract great investors.

Comments

[Drew Veengas]

Thanks for the great advice. As a first time entrepreneur (non-programmer myself) just starting to look for introductions to VC's, I am also wondering how much, aside from industry knowledge of a topic, technical skill at implementation of an idea weighs in on your decision making process. Is it worth finding another founder with that specific programming knowledge, or is it best, in your opinion, to find that skill-set post funding. Is this a non-starter for you?

Thanks for any response in advance.

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Great article. Lots of good information and deffo worth a read.

I started writing a comment to this but it became lengthy enough for me to just post it on the blog of the VC firm that I work for.

http://blog.wasabiventures.com/gaining-credibility/

Thanks for posting!

[Ccrystle]

As a serial entrepreneur, I can say the advice still holds true.

Having a bunch of successes helps, but you're only as credible as your recent integrity, where integrity is the measure of the gap between what you say you'll do and what you actually do.

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Hey David,

I just want to say thanks for such a well written article.

As an entrepreneur lacking credibility, this is exactly what I needed to read.

Thanks for taking the time to share it.

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[Billy Kirsch]

Working with my own start-up the past three years has taught me to deliver everything and more than I promise. Going above and beyond with every client has propelled my young business to success. Now my past clients are selling it for me. So I resonate with your point about 'demonstrating' capability.

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Great post. I am also a young entrepreneur and looking to meet some important clients tomorrow for the first time. Sleep is going to be little, to none.. But this read was great and encouraging.

Sometimes I think the hardest part is just having the confidence and motivation to do what it takes. Don't listen to people who haven't done it, why? Because they won't allow themselves to do it.

[Karlie Robinson]

Thanks for the post. I am a serial Entrepreneur, but have always bootstrapped my businesses and find that the above criteria for trust apply to more than just VC.

Any Start-up needs to get through the same hurdles with customers, vendors and even landlords.

[Rachel Patterson]

This is awesome advice. Thanks!

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[Micah Deriso]

Another piece of advice from a non-VC funded start-up...Do not go to the VC community early as a brand new entrepreneur. It is a funny situation to be in but it is also very true, if you go too early you are telling "stories" about what could/should happen as opposed to what "actually" happened. I believe that in today's climate VC's are incredibly diligent about risk and that is expected, they have to provide returns for their fund and be diligent about the people they invest in.

My company went for funding early and decided not to take anything. I can tell you from experience that you are better off going as far as you can too prove your business model in the real world before going to VC. I think if you can go out and acquire great customers as an unfunded startup then you are light years ahead of the pack. Everything changes...valuation, negotiation, control...everything. You prove the business model and, more importantly, the teams ability to execute.

Is it hard? Yep. But it's worth it.

We have bootstrapped to date and we now see capital in a completely different way...a way to fuel growth as opposed to paying bills. This fundamental change in philosophy changes everything when talking to any investment partner and truly changes the culture of the company.

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[Dan]

My question is far less technical, I know exactly what I need for an idea, I know 70% of what is involved to make it viable. However I don't know hwere to start to look for investment or what the best approach would be for the presentation?
Regards
Dan

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