What we mean when we say it’s too early

By Hector Mason

What we mean when we say it’s too early

Being transparent

At Episode1, we make a point of being open with the entrepreneur. Where possible, we will explain why we’re not investing as this will help them hone future pitches. Some reasons we wouldn’t invest are: you’re addressing too small a market; the product/tech is not defensible, or the competition’s too far ahead.

However, very often the reason is simply that ‘you’re too early’. These words are looked on suspiciously by entrepreneurs who often think it’s an excuse for not telling them the real reason we don’t want to invest. However, I actually think it’s a totally reasonable answer for us to give an entrepreneur.

What’s not fair is saying it’s too early and giving no context to the decision. If it’s really too early, we will be able to give you an indication of what the business needs to do for it to be an attractive investment. I most often find myself telling entrepreneurs to get some early pilot/beta customers who are delighted by the product. Paid is always best, even if just a token sum. I recently met with a friend who’s setting up a business in the RPA (robotic process automation) space and he got me and other trial customers to commit to paying for the tool, prior to it being built but refundable if it’s not useful to me. This is the best way to work out whether people are doing you a favour or if they genuinely want and need the tool. I was impressed — they’re building something awesome, I really back the team and their approach is spot on.

How much traction should you have?

For us to lead a proper seed round of c£1m, the team and vision would have to be really extraordinary for us to take a punt without any early customers who’re really on board with the product/idea. It does happen, as in the case of CloudNC, one of our most exciting portfolio companies. Two guys solving something that no-one really knew could be done. We knew that if they could do it, it would be huge, and if anyone could do it, it was these two. So we took the punt. So far, it’s paying off. These cases are outliers, though.

Most of the time, we see companies as early as we think it’s realistic that we’ll invest. That way we get the best valuation and give ourselves the best chance of winning the deal. Inevitably, this often means we strike just too early. Good team, nice looking product but lacking the market validation that we need to get comfortable with before writing the cheque.

The most frequent response to ‘you’re too early’ is ‘do we need to hit a certain MRR?’. For execution plays like two-sided marketplaces, MRR is important. We need to see that the founders can execute on their vision, driving engagement in the platform and overcoming any chicken-and-egg problems. For a technology-driven business, like CloudNC, MRR is less important. These businesses will have a more binary outcome. If they can build the tech, it’ll be easy to sell because it addresses a well-known and very expensive pain-point. If they can’t build the tech, the investment will go to zero.

Sometimes we just need time

There are also cases where we like the product, the market and there’s reasonable traction, but we have doubts about the team’s ability to execute. Here we’d probably say we want to stay in touch and have regular check-ins over the coming months. This would give us time to get comfortable with the team, albeit risk losing out on the deal to another funder. This is a risk we sometimes have to take — at seed stage it’s all about the team and we need to have real conviction in them before investing.

I think this covers the main points surrounding the bugbear of being ‘too early’. Understandably it’s not what an entrepreneur wants to hear and I get the impression from founders that many funds use ‘too early’ as an easy way out of saying no and giving honest feedback. I hope this article has conveyed that at Episode 1, ‘too early’ isn’t a no, it’s a ‘let’s see how the next few months go and if there’s some exciting progress, this might be one for us.’