Why We Passed on This Startup (Episode 1)

(I’m on a family vacation this week so putting energy into other important endeavors 😉. This is the first ever issue of “Why We Passed on this Startup” that was released before I started writing on Substack. So, the vast majority of subscribers have not seen this. Hope you enjoy it now 😀)

-Matthew

I'm introducing a new newsletter series called “Why We Passed on This Startup.”

Most of the time, on LinkedIn or on your social media channel of choice, you see posts from investors such as,

“Why We Invested in XYZ Company…”

OR

“Excited to announce ABC Company’s Series B! The company is X and Y and represent Z…”

All this content is touting WHY they invested in such and a company.

That’s cool and it’s does a nice job of calling out the win (I do myself), but for founders, there are very little learnings from such a production.

When I was a founder, I got really agitated at this victorious processional. I thought to myself, “That’s great, but I have no idea what you saw in them and why I am any different?!”

The hype posts from investors made me mad, actually!

That’s why I am kicking off a periodic series that I call, “Why We Passed on This Startup,” to get to the underbelly of WHY I and Tundra Angels decided to pass on a startup - either in conversation before the pitch meeting, or a pass decision after the startup pitched to the Tundra Angels group, or after due diligence post-pitch meeting.

This series intends to provide an inside look into how I as an investor make decisions and reveal why we might invest in a startup, and why we did not.

The ultimate aim is to help founders be empowered with the delta on what may be missing from their respective companies as they look to build product, acquire customers, fundraise, build defensibility, and win in the market.

In every episode, I will anonymize the stories but leave most of the details so that founders can learn from it all. So here we go…

Once upon a time, I met a startup team that had a groundbreaking technology for the sector. Truly, it represented and still represents the future of a particular use case and an industry as a whole.

I liked the startup and the Tundra Angels investors really liked the startup as well. For example, here is text from an email that I sent to the Tundra Angels group at one point:

“For context, this company pitched in ________ meeting and gained heavy interest from our group. Our group ended up assembling a 5-6 member due diligence team that put together a robust due diligence memo for all of our investors. Concurrent to that, I put them in touch with ______________ investors that could make sense to lead their round. The consensus from the ones that looked deeply was "interesting technology but too early (i.e. not enough market traction)." In our group, I ended up giving the team the answer, "Get market traction/pilots and come back." 

Now, they have pilot agreements with three _(industry players)______ as well as enthusiastic champions that could be leveraged for us to validate the customer need in due diligence. Importantly, they have also sharpened their use case of the technology….. Sharpening that use case brings a much better level of clarity to the technology and opportunity.”

For context, the founders were executives in their industry. The startup had validated that the technology worked in a certain context, and was raising funds to build their production-ready product that could implement in their context.

Traction-wise, the startup had acquired three highly reputable pilot sites in the industry that they were in. One of the company names in particular was known nationwide with a reputation of integrating up and coming technology in the organization’s process.

The startup also had robust IP relating to the method that their technology took to accomplish the outcome.

The breakthrough was undoubtedly clear. Where things started to get not-so-clear was after the pitch in several discoveries in due diligence.

The Equity Math Didn’t Compute

The founders had came from industry but were new to the venture backed fundraising world. As such, the valuations of earlier rounds (1.5 years ago) and this round were essentially at the same valuation. However, the company had made meaningful de-risking progress from a technical and a market standpoint. So why wasn’t the company raising at a higher valuation?