Mastering the 5 M's for Startup Investing & Funding Success

There is a direct correlation between an investor understanding the 5 basic principles of considering making an investment and an entrepreneur receiving the appropriate type and amount of funding to launch their startup. Therefore, for both funders and founders, focus on these 5 M’s in evaluating any successful entrepreneurial investment: (1) Management, (2) Momentum, (3) Model, (4) Motivation and (5) Market. As an active angel investor, I consider these 5 concepts on a regular basis when evaluating entrepreneurs for investments. It's an easy way to check to see if a startup is viable, having a constructive conversation with the founder and with other investors about the opportunity.

These 5 M’s are also revisited by MANY angel groups, syndication networks, and angel conferences in analyzing startups for investment at the early stages of discussing a possible investment. At Stella Angels, we regularly use this analysis to be able to discuss about a startup that has just pitched to us so that all the members can chip in and lend insight. Here is our scorecard or framework for this 5 M's analysis. We like to keep it simple so that more people can feel included in evaluating a company in a concise way and in an efficient time period.

Investors are looking for the right team to scale the right company with the right customers for the right impact, so from product-market fit to founder-market fit, it all needs to make sense to them in a VERY high-risk business that is investing in startups. They want to see scalability, high gross margins, a large niche market, unfair competitive advantage, and customers hungry to buy the solution (albeit BtoB or BtoC). When using the 5 M's analysis, an investor can easily evaluate these needs and it also is:

• Easy enough to memorize
• Easy enough to call up in a coffee meeting
• Different enough from a typical pitch that you can get the founder talking freely
• An entrepreneur might learn something from walking them through the framework
• Eases into DD checklists
• Easy way for entrepreneurs to checkmark if they have covered these topics in their pitch or when speaking with an investor during a coffee meeting

So let's dive in. OH, and BTW, the slides below are part of my new She Invests! angel Institute for angel investors to be better equipped with education & frameworks to invest.

The 5 M's for startup investing (for investors) & funding (for founders) success

(1) Management (the team)

The passion of the startup individual or team is contagious when it is genuinely communicated and embraced by all involved. Is the founder or founder team experienced enough to take this startup towards creating value inside the company (culture) as well as execute on product deliverables? Is the founder coachable? Do they have the right board of advisors (scientific, technical or industry board) who have validated the startup potential and gotten in back of the mission? How credible is the startup team? Do you trust them to effectively use your investment dollars well? How experienced are they in the industry they are going into? How experienced are they in creating startups? One huge consideration and one that really makes the “female founder – female funder” connection really thrive, is the personality match between the entrepreneur and investor. They will be spending many hours and years together so that connectivity is crucial for a successful return on investment. The tenacity/grit of startup founders has been a deciding factor in many investment decisions.

One of my portfolio companies, TAGit , founded by Ana Bermudez , is a prime example of this consideration. Ana is the quintessential, hard-working, focused, dedicated millennial Latina female tech founder who will be successful in any venture she puts her mind to and it helps that TAGit is in a huge market solving a solution for many TV viewers.

(2) Momentum (traction)

The type of traction a startup can garner from their immediate startup ecosystem supporting their endeavors, advisors connecting them to great collaborators, and just a non-stop attitude is what investors want to see. Many entrepreneurs ask how do they show traction at early stages of launching their startup. Simple traction of presenting at conferences, meeting with angel investors (even over coffee), pitching at startup events, or customer interviews are great ways to show you are on the right track. However, the number one way that you can show traction is actually getting paid customers, the speed of early adoption by your target customers is crucial to your continued growth of happy customers.?

A prime example of an entrepreneur who showed such amazing traction that she was able to close a significant round of seed investments for her company. Her traction spanned from media hits, concrete strategic partners to scale her business, and beta testing with communities that had measurable economic outcomes for her startup. I am proud to say that she is one of my portfolio female founders, Jennifer Saxton , founder of Tot Squad .

(3) Model (show me the money)

The model component of the 5 M's is as simple as the business model. The startup needs to be able to communicate the way it thinks it can make money, through BtoC, BtoB, franchising, licensing, etc. There are so many ways to build a business model, but those startups who are successful really understand the intricacies of their industry and innovate around how they can make sustaining revenues for the highest return for their stakeholders. A prime example of investing in a startup primarily because of the business model is one that understands how to create value and revenue at a very early stage to be able to fund the larger vision. This shows business acumen in the industry, the value of the investors’ money and returns, and an astute business model innovation.

One of my superstar portfolio investment female founders, Kate Dilligan , CEO of Cooler Heads , (all my portfolio female founders are rockstars, BTW) had a fantastic business model that allowed for a traditional medical device company, a cool cap therapy device for cancer patients to keep their hair, to turn the traditional high priced medical device solution to a renting solution for the patients. I valued that Kate not only is a guru of the commercialization pipeline for such devices (and a Stanford Grad at that), she knows that innovating on the business model was equally as important as the technology, hence, investors have always been highly interested in the opportunity to financially support Kate in her endeavor to democratize and make the cooling system more affordable for ALL cancer patients.

(4) Motivation (why now?)

For a product to penetrate a market, a certain market factor needs to drive a large component of the business model. The market driver might be that the technology is ripe enough in the industry to support a new way of delivering a certain product (Spotify) or that the customers are ripe for a new solution in the growing sharing economy (Airbnb). There is an urgency to capture the increased interest or leverage certain new technology to launch & receive funding for a new venture. Another consideration under “motivation” is the team-product fit. Why is this team best suited for producing this product and executing a flawless business model for optimal proof of concept validation (and actually having a startup survive)? If the product is so suited for the team as well as the market, does it have enough IP (Intellectual Property) protection to ensure long-term success?

An investment I made as a Pipeline Angel is such a great example of this category, ZelosDx , developing blood testing products to help researchers make breakthrough discoveries in brain health and disease, founded by Marie Wesselhoft . ZelosDx is a personalized medicine company developing blood testing products for brain diseases and is dedicated to providing neurologists with critical data that can be useful in diagnosis, monitoring, and assessing therapeutics response. Personalized medicine is a HOT TOPIC right now and it is gaining more traction as the wave of the future for curing diseases and managing chronic conditions. In addition, the product-team fit is extraordinarily perfect for sustaining growth and scientific discoveries.

(5) Market (are there enough customers to buy?)

There are two approaches to help define the market: Top-down and Bottom-up. Top-down takes a macro-economic view of how large the market is, competitors, and current market trends. Bottom-up takes the customer view of how many items will be sold to how many people while not taking too much notice of the larger drivers in the industry. The product-market fit is crucial in the successful launch of startup, connecting the passion-driven development of an impactful product with a market that is hungry for the solution. A typical VC would only look at Market of >>$500M, growth rate of >>10%, a large pain point among customers (in numbers/size of customers and value to the end-user), and a unique approach to solving pain.

My very first investment, Hera Therapeutics, which then was renamed Antiva Biosciences , is now being led by a phenomenal female CEO, Gail Maderis . The company changed its name from Hera (after the Greek goddess, a reference to women’s health) to Antiva (to represent antiviral) to indicate it has broader antiviral potential. Antiva Biosciences, Inc. is a clinical stage biopharmaceutical company developing novel, topical therapeutics for the treatment of diseases caused by HPV infection.?There’s about $4 billion spent annually on the diagnosis and treatment of HPV. This is a large market where the startup can make a HUGE impact.

To wrap it all up

For entrepreneurs, being able to clearly articulate the unique 5M’s to an investor will get to the next meeting, which is the only goal you should have when speaking with potential investors.

It’s a delicate dance founders and funders take in increasing trust between them through genuine conversations, breaking down market drivers, and investigating how unique the product is for the customer who is in desperate need of a solution. Albeit if you are in tech, like Ana Bermudez or Samantha Urban, focusing on these 5 aspects will allow for you to easily articulate your value and startup plan.

A collaborative approach between female founders and female funders on not only giving and receiving funding but supporting one another with strategic oversight is a significant reason that female-led startups are thriving! Connecting with the network of amazing female angels and VCs will also solidify that the female-led startup receives more follow-on funding for more startup progress. More communication between investor and founder allows for more rapid growth and more opportunities to leverage the network for better partnerships and, of course, more funding as needed.

Investing in startups is a high-risk proposition. These simple 5 M’s help demystify the most important aspects to consider and at least start the due diligence process with a business seeking funding.

Some insight on this edition that, I think, for me, is equally as important as the content

This newsletter is also a test of my own growth. It is modified and expanded (with examples) from a NAWMBA (The National Association of Women MBAs (NAWMBA) is a not-for-profit organization dedicated to advancing women into leadership positions - which is no longer in existence) blog post, a Stella Labs repurposed blog post and a MULTITUDE of different conversations and presentations I have made in the past and continue to. I had an extremely busy week this past week with our Biola University startup pitch competition, Stella Labs final recordings for our new platform (coming soon!), my daughter's dance competition that I wanted to be very present at, communicating 4 times to Orange County from San Diego in a span of 6 days, and being a mindfully present mom for my graduating college senior and an almost finishing up freshman in college. Needless to say, I am exhausted and the work-life balancing act was legitimately crazy this past week, but I made it! I videoed in a corner of a hotel room because that was the best light and background, but we did it! I missed 1 of 8 of my daughter's dances this weekend because of work, but I cheered my typical loud latina-italian loudness for all the rest, but I did it (& my daughter ROCKED all of her dancing). So, for this newsletter, I was really challenged to either stay up for 2 nights and right new content, like I always do, or give myself some rest (I typic;aly only sleep 4-5 hrs a night), enjoy being IN THE MOMENT this weekend for my family and for my students at Biola, and repurpose yet REFRESH some GOOD content that I have already, in pieces, shared? Yes, I did it! I didn't listen to my Type-A mind say that it needs to be perfect and pristine, I proudly repurposed & updated it with some exceptional examples of fabulous women founders (we never can get enough of that). So, this insight was huge for me, and I know when I push through a barrier of my own doing, I am so much better off for it and I learn a ton just doing it (albeit something simple like this). Hope you enjoy the content, I truly use this framework almost EVERYDAY! I have it committed to memory and it's easy to recall and talk the details around such a simple list.