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The 5 P’s of Investing in a Startup – Advice from a VC

November 21, 2014
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I was in a meeting today with a legend in the Canadian venture capital world who has made in excess of $200 million personally throughout his career. He’s done deals all over the world. But, more impressive than the money he has made is the diverse industries in which he has made that money.

This businessman has been involved in deals, on a very high level, in the mining, oil and gas, technology and even entertainment industries (he helped start one of the biggest film studios in Hollywood). Unlike most successful VC’s I know, this man has made his fortune across a broad spectrum of industries, which is remarkable.

Like many great businessmen, he is also extremely humble. He’ll be the first to tell you about the mistakes he has made in his career – a commendable trait. And, as is the case with most older gentlemen, he tells awesome stories because he’s put some great years in his life. (My business partner has a philosophy passed down by his father: if you ever get opportunities in everyday life to chat with seniors, seize the moment. They all have experience, wisdom and educational stories to tell. Listen and learn.)

Wrapping up the meeting this venture capitalist decided to share some investing insight. Given the nature of our meeting (I was pitching him), he told me what his 5 P’s are… in other words, how he decides whether or not to fund a deal (startup).

 

The 5 P’s of a Successful Deal

 

Product

Obviously, the company needs to have a product with clear differentiators which make it better than what’s currently on the market. However, he also stated that it has to be in a market that is currently growing (on an annual basis) by more than 5%.

 

People

The people in management positions have to bring something to the table different than the last guy. Management can’t all be engineers because few deals will get done. By the same token, you can’t have a bunch of finance guys running a tech startup. The team must be balanced.

 

Paper

Who owns all the stock? Are the current shareholders in the company reliable? Do they have the ability to hold the stock for long periods of time to properly allow the company to grow? Or are they just looking to make a quick profit on their position?

The shareholders who own major blocks of stock in a startup (public or private) absolutely must see and believe in the long-term vision of the company. And that’s why it is ideal that the founders of the product are the largest shareholders for as long as economically possible.

 

Promoter

No matter what type of company it is – be it mining, entertainment, high tech or retail, if the startup wants to succeed it needs a great promoter.

The people running the operations of a startup don’t have the time to sufficiently promote the story to potential new customers and possibly even investors; and they may not even be good at sales.

A jack of all trades is a master of none. Without a promoter the deal won’t succeed and progress as quickly as it should. Promoters fill a critical void evident in many startups today.

 

Patience

Building a company or investing in one early on is not meant to give you a shot of adrenaline.  Famed economist Paul Samuelson once said that “Investing should be more like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas.” The same goes for building a company. It is a war of attrition and comes down to the members of the team focusing on being as productive as humanly possible, every day. Eventually, good things will start to happen; just be patient.

As he walked out, the venture capitalist told me that every time he sacrificed one of the 5 P’s and went ahead and invested in a startup, it ended up failing, resulting in a loss of capital…

I’ll know soon enough whether he thinks our deal has the 5 P’s.

 

Stay hungry,
Aaron Hoddinott signature

 

 

Aaron

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Like all of you entrepreneurs and investors out there, Aaron has been in the trenches. He is the founder of an influential online media and PR company. From oil wildcatters to mining prospectors, tech gurus to medical doctors, and even celebrities, Aaron has helped market and expand brand awareness for a diverse range of publicly traded companies ran by entrepreneurs from all walks of life.

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