Updated: May 28
"If you’re starting something on your own, you better have a passion for it, because this is hard work."
Sallie Krawcheck, Co-founder of Ellevest
Building a startup requires founders to be persuasive. They have to excite others to join them in their pursuit – from closing deals with customers to finding employees, recruiting advisors and eventually, getting funding. Some people believe that passion is the key ingredient that makes founders persuasive.
A founder’s passion contributes to their success in two important ways. First, it helps buoy their spirits during challenging times. It gives them the motivation and energy during the long and sometimes unrewarding hours that typify the early journey. And, passion also helps them secure resources, energize others, and build social capital from the ecosystem.
But, how important is passion and is it enough? Academic researchers have been studying what factors affect investors’ decisions since the 1980s. There are some important insights from this research I want to share here.
Passion plays a role in soliciting help and garnering support
Passion creates so many positives for the founder. It gives them strength and courage. It helps them mobilize energy. It encourages them to pursue challenging goals. It gives them persistence in the face of obstacles. It even makes them willing to work long hours. All of these benefits have been proven. Passion is clearly a key ingredient for early stage startup founders.
For early investors, the founder and their team are the startup
The founder and their team are critical to early investors. These investors know how hard the task is. They are looking for founders they think can overcome the challenge and get the hard work done. They are evaluating if the founder has what it takes to make it. At this stage, founder’s passion is important. But, it’s not the only thing they consider. They also want to see experience in the industry, personal integrity and if possible, experience in startups. Passion for the problem they are trying to solve signals commitment to building something impactful.
Passion is also important at the funding screening step
For both angel investors and venture capitalists, founders have to show their passion to get through the screening process. Founders’ enthusiasm for what they are doing helps investors be more confident in the entrepreneur. Even investors can get caught up in the excitement the entrepreneur displays. This passion may even reduce the level of risk investors perceive. It works well in getting a founder the opportunity to pitch
But, passion is not enough to get funding Sadly, once the pitching process moves to actually asking for an investment, passion loses its power. Sometimes, it even has a negative effect. By the time investors are seriously thinking about investing in a startup, here’s what they are looking for:
Know Customers’ Problem. Investors want to know you understand customers. What problem are you solving? Why is it an important problem? How big is the problem. This is the first place to show your business savvy and that you’ve done good customer research.
Have the Right Solution. This means that you also understand competitors. You have to be able to show how your offering is differentiated from current solutions. But, investors are also evaluating if it will work. You solution has to be different, better and achievable.
There will be a Financial Return. This the next place your business savvy needs to come through, again. You have to convince them the market is big enough to be worth pursuing. And, you’ve thought through a range of exit possibilities from standalone growth to acquisition to IPO. They are also looking to see if you have a realistic estimate of the company’s worth. They are mentally calculating how much time and cash you are going to need, what their share of the company is and what you might be worth at the end.
This Team has the Ability to Capture the Return. This is sometimes expressed as “I want to back an A-Team with an A product.” Investors are looking to see if the team knows what they are doing, if they have integrity and if they are open to feedback. With the odds against a startup’s success, investors want to feel they are making a good bet. Here is where enthusiasm and commitment, but not blind passion need to come through. Too much passion here can backfire. Sound business savvy needs to be more evident.
Bottom-line, passion may be the most critical ingredient for a startup founder. Solve problems you believe in. Go big in finding a better solution. Use your passion to recruit others to your cause. But then, temper that passion when pitching to investors. We think of it as the passionfruit at the bottom of the yogurt. The yogurt is only okay without it.
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