Early Stage Funding: Learnings from Past Mistakes with Angel Investors
A Startup Builder's Journey Through Trials and Triumphs of Partnering with Inexperienced Investors
The world of startups is fascinating, thrilling, and fraught with pitfalls and opportunities. One of the most crucial aspects of this journey is securing funding, especially in the early stages. While venture capital might seem like the ultimate goal, many entrepreneurs turn to angel investors to bridge the gap. However, not all angel investors are created equal. My own experience taught me a valuable lesson about choosing the right partners for my startups.
Context: Partnering with Novice Angel Investors
When I began my career as a startup builder, the allure of quick and accessible funding led me down a path towards partnering with angel investors who were themselves in the early stages of their investing careers. The initial excitement soon turned into frustration.
In November 2015, after many years of toying with various ideas, I launched in Cluj-Napoca, the first car-sharing service in Eastern Europe, Pony Car Sharing, alongside a team of angel investors. It was a fleet of rentable cars paid by the minute, using only an app on your mobile (nowadays quite a common thing).
Users only paid for the minutes they used the car, a clear advantage and a concept already experimented with in big Western cities like Berlin and Vienna.
Pony was my first success in two significant ways: the investment was minimal compared to other projects, and it wasn't just my accomplishment, but also the first endeavor to involve co-founders and early-stage investors. This is because, in entrepreneurship, 1+1 doesn't always equal 2. It can be much greater or much less, as team dynamics are not simply the sum of their components.
Pony quickly reached 2000 users, expanded to Bucharest in 2017, and even made its way to the third city. Then it all ended.
The transition from innovation to widespread adoption takes time. Time is measured in years, and years are marked by the need for capital. Unfortunately, things didn't work out in this case. My dream of building a large mobility company collided with the investors' reluctance to provide additional funding or accept other co-investors. The conflicting visions led to the project being stifled by a shortage of cash.
The biggest challenge arose from a fundamental misunderstanding of early-stage startups by these back-then novice investors. They were unable to grasp that rapid profitability in year one might compromise long-term growth. This clash of expectations led to strained relationships and hindered the startups' potential.
The initial investors, who were also entrepreneurs, were undoubtedly visionary. However, there is a significant difference between being an entrepreneur and being a genuine investor. Being a true investor entails comprehending that a business may experience losses in the present but achieve success in the future. It also involves understanding the concept of return on investment, particularly about innovative technologies and their adoption.
So Pony became a paradoxical lesson about lacking money. As customer demand grew, the project needed more funds.
When we discussed new investments, the question was, 'How much do we earn this month?' Different reflexes. With Pony, the profit didn't come quickly, and that was the beginning of the end. After a year, we still needed money, as we wanted to expand. The promise of profit grew, but the moment of reaching that threshold was postponed: Pony grew, thus needing a capital infusion. An infusion that never came.
In the startup world, you deal with large sums, hundreds of thousands of euros, millions. Back then, it was like, 'Hey, I gave you 100,000,' as if someone handed you the Moon. But that money disappears immediately into the J curve.
Now, investors and entrepreneurs view such sums differently. In my opinion, if Pony had received a pre-seed investment of 500,000 euros, followed by an additional investment of 2-3 million - a reasonable amount for a business - it would still be flourishing today.
Learnings: Strategies for a Better Future
From these struggles, I distilled several key lessons that might be beneficial to other entrepreneurs:
Know Your Investors: Take time to understand the experience, expectations, and mindset of potential angel investors. Align with those who share your vision and understand the unique challenges of early-stage startups.
Clear Communication: Set clear expectations right from the start. Communicate your growth plans and explain why immediate profitability might not be the optimal path.
Seek Mentors and Advisors: Experienced entrepreneurs and investors can provide insights that help in selecting the right funding partners.
Consider Alternative Funding Sources: Sometimes, it might be wise to explore other funding avenues, such as grants, crowdfunding, or self-funding, if suitable angel investors are not available.
While angel investors can be a valuable resource for early-stage startups, it's essential to recognize the potential pitfalls of partnering with those who might not fully understand the startup landscape. My journey through these challenges has been a rich learning experience, one that has helped me grow as an entrepreneur.
By sharing these insights, I hope to equip other startup builders with the tools and understanding to make wiser choices in their funding endeavors. After all, the right investment partners can be the wind beneath a startup's wings, propelling it towards success and innovation. The lessons I learned are not only reminders of where I went wrong but signposts guiding me and others towards a more successful future.