Why We Passed on This Startup (Episode 6)

Hope you enjoy the 6th installment in this series! (No voiceover today due to poor audio quality). Now, here is this episode!

Once upon a time, I met a startup team.

Tim was the founder and CEO of XYZ Company. The startup broadly played in the healthcare space. The startup possessed an intriguing piece of novelty and IP that, if proved out, would have a completely new way of thinking about this aspect of healthcare. The model was B2B2C. XYZ Company sold a product to the corporation (the “2B) which would activate its employees (the “2C”).

XYZ Company had generated revenue and had been running for a few years. Tim came to me looking to raise a bridge round of capital.

As I and Tundra Angels progressed in our conversations with Tim, some dynamics appeared that made us question the opportunity.

Shallow Knowledge of IP

At the outset, I really liked the potential of the IP. So I asked probing questions about technical aspects of the IP. As I asked more specifics about the intricacies about why it worked this way and what else could be shown, I observed something curious - Tim kept staying at same surface-level of depth when he was explaining the IP. Once or twice, he re-framed the same explanation in a metaphor as if to enhance my understanding. But none of this was answering the deeper questions that I was seeking.

Tim finally conceded, “I’ll have to bring my inventor onto a call and we can chat more specifics.” 

Technical experts are part of startups. But the proposal about bringing in the technical expert after Tim had unsuccessfully answered deeper questions gave me the impression that Tim, as the CEO, didn’t understand the technical aspect of the technology. I didn’t expect Tim to answer me in scientific terms. But I also expected him to be able to answer business implications of the technology.

The Focus on a Few Big Whale Prospects

As we progressed in conversations, Tim kept on bringing up the same 3-5 potential customer names over and over again in our conversations. These customers were major enterprise customers. One particular customer, call it Customer X, was very close to signing a customer contract. One contract could potentially have meant millions in revenue for XYZ Company.

Now, there is an alluring nature of a startup courting major enterprise customers. And yet…

✅ Startups need two things to be successful with major enterprise customers:

1. Time - in order for the long sales cycle to play out to generate revenue

2. Money - in order to survive the time period without generating revenue ✅