What are investors initially looking for in Startups? What are the challenges faced by the startups? Any recent trends the way startups are headed? Investor Constanza Diaz shares her insights on the interesting aspects of being an investor, how startups can prepare themselves for succeeding in the present, the recent trends and more in this article.
The Startup Club: Tell us more about yourself.
Constanza Diaz: I’m an investor at Octopus Ventures, focusing on B2B SaaS companies at the Series A and B stages. I’m originally from Santiago, Chile where I studied Engineering and worked a couple of years in Strategy and Management consulting across a wide range of sectors such as utilities, manufacturing, and retail. I then moved to Amsterdam to work in the open banking project at ING bank and then moved to London to do an MBA. After some stints in private equity and M&A, I finally ended up in the promised-land in venture capital.
The Startup Club: What do you usually want to see in a startup before you decide to look into it further?
Constanza Diaz: In the stage of investment, typically at Series A+, I prioritize identifying product-market fit. While I know that’s a very elusive term, my goal is to observesustained and preferably accelerating traction. It is crucial for me to see a team that possesses a profound understanding of their ideal customer profile (ICP) and can effectively communicate the unique selling proposition (USP) of their product to potential customers. I expect the company to have a customer base that aligns with their ICP, with a group of them having been with the company through at least one renewal cycle. This allows us to gain valuable insights into retention metrics, inherent churn, and the potential for upselling. At this stage, the company is prepared to invest further in Sales & Marketing efforts to expedite growth and find a successful go-to-market strategy.
The Startup Club: What are the biggest challenges that startups usually face in their very first steps?
Constanza Diaz: I know next to nothing when it comes to pre seed or when a startup is just launching, but I think the main challenges are different in two distinct situations:
If you mistakenly believe that you have achieved PMF and hastily scale your operations, your go-to-market efforts can become very inefficient due to the inadequate identification of your ICP and churn rates start to increase. Consequently, you end up with a low ARR growth, high churn business that it is burning too much cash.
On the flip side, when you have genuinely achieved PMF, the primary challenges lie in discovering and refining the appropriate GTM strategy. Sustaining a high ARR growth rate becomes increasingly challenging as your business gets larger, as it requires closing more or larger deals. And so the efficiency of your sales efforts deteriorates. Additionally, hiring and retaining the right talent, particularly when expanding into new geographies, is not easy.
The Startup Club: What is the most interesting aspect of your job?
Constanza Diaz: I’d say the most exciting part of my job is the opportunity to meet founders and delve and learn about a wide range of sectors that are been disrupted by SaaS solutions. It is truly exciting to meet innovative entrepreneurs and hear about their motivations and the solutions they are building.
The Startup Club: Is there a trend that you have observed in the recent years in terms of the direction the startups choose to take?
Constanza Diaz: Following the period of rapid growth at any cost in 2020-2021, there has been a significant shift in companies' mindsets towards prioritizing efficient growth. As a result, startups are now more focused on scaling their businesses in a sustainable manner, directing their investments in Sales and Marketing towards high-yield activities. The fundraising landscape has also changed. Valuations have decreased, and it has become more challenging to secure funding. Consequently, startups are required to be more discerning and intelligent in how they allocate their funds and which sectors they target, given the reduced availability of capital.
The Startup Club: What are the top 3 traits that startups should have to be more appealing to investors?
Constanza Diaz: First a clear positioning and USP. Startups need to have a clear understanding of how their solution differentiates from the competition – beyond just a small set of arbitrary features their product has vs their competitors’. Investors want to see that the startup has identified a specific problem or need in the market and has a compelling solution to address it.
Traction and top-line growth is also key. Investors are interested in startups that show strong traction and growth potential. This typically involves demonstrating revenue generation, customer acquisition, and user engagement.
And lastly, a committed and strong team. Investors recognise that a startup’s success is heavily dependent on its team. They look for founders and team members who are not only knowledgeable and skilled in their respective fields but also highly committed. Having to fill in too many c-level positions with external talent right after investment is always risky.
The Startup Club: Do you have any piece of advice for startups that are trying to navigate the current environment and present themselves?
Constanza Diaz: I have two main pieces of advice:
Focus on your ROI and providing a quick time to value. Investors are interested in startups that can demonstrate a tangible ROI, preferably within a short timeframe. Emphasize how your solution addresses a real pain point in the market, acting as a painkiller rather than as a vitamin.
Have a Plan B that allows you to own the destiny of your company. Given the current macroenvironment, it's essential to have a backup plan that doesn't solely rely on securing new funding from VC investors. Aim for cash neutrality by focusing on generating revenues from customers. Many founders forget sometimes that revenues are the best form of funding. Stay lean, stay focused, and work towards extending your runway. A higher revenue will also help you to minimise dilution on subsequent funding rounds.
The Startup Club is thankful for your participation in our Investor Advice Series. Thank you once again for sharing your experience and insights with our community.
Visit our website here to RSVP our upcoming events.