I’m writing this post for one simple reason: to be able to point every would-be-entrepreneur who asks me what it takes to “get venture capital” to the permanent link rather than continue to explain to them. It’s all about efficiency. So, what are VCs looking for before they decide to invest in a start-up? The good news is that I’ll disclose the secrets here. The bad news is that even if you cover all of these elements it still doesn’t guarantee you will get funding (more on this point later). Without further adieu, here is a short list with brief explanations (see if these sound familiar)…
Some sort of differentiated, proprietary technology / competitive advantage. You need to be able to convince VCs that your idea/company is differentiated from the current masses as well as those that will inevitably come to market if it is such an attractive market. I think Jack Welch said it best when he said, “If you can’t be #1 or #2 in your market, why bother…” Spend the time to understand how your idea/product/service is different from what is currently being offered and make sure it is a material and valuable difference. You’ll often hear VCs complain about the plethora of “me too” companies that flood any particular market of interest these days. Most VCs don’t like making these types of investments.
Large ADDRESSABLE market. VCs invest in companies that are going after very large markets. How large? We’re talking annual, aggregate sales in the hundreds of millions to billions of dollars. Most entrepreneurs make the mistake of assuming “available” = “addressable” when calculating the size of the market they want to sell into. Be realistic here and spend the time to understand that market segment with the total available market that you can pragmatically sell into near-term.
A clear plan, budget, and use of proceeds. I use the term “clear” here loosely as most VCs are willing to overlook the fact that such a plan hasn’t been articulated in writing if they can see it for themselves (under principles of “been there, done that”). Having said that, you should have at least thought through how much money it will take to bring the product/service to market, have an idea on how you might actually go about achieving such results, and how - if funded - the money will be spent. To elaborate a bit, there needs to be a correlative use of the VCs dollars such that he or she knows how the money will be spent so as to reduce/eliminate any technical, market, financial, and operational risk of the company succeeding.
Manageable Risk. You can read my previous post on risk, Arbiters of Risk, for more information but it suffices to say that we VCs are “risk masters” and attempt to create value through the calculated and systematic reduction of the technical, market, financial, and operational risk found within start-ups. One of our jobs is to be able to reasonably and quickly identify such risks, calculate them, and then work with the management team to mitigate them. Some funds take bigger “leaps of faith” than others, but almost all of us focus on this aspect of the business from the first day.
Strong team able and willing to work with the VCs. Have you seen the acronym D.O.E.? No, not the Department of Energy. I’m speaking from a human resources perspective. D.O.E. stands for “depending on experience” and is typically associated with compensation but, for VCs, it’s a subjective measurement of operational risk based on a company’s founders/management team’s background. The more empirical evidence that you can show that you/your team can succeed the better your chances of attracting and obtaining venture capital. This criteria is a bit more nebulous that the others in that funds differ on how they judge the strength of the individuals involved. Even if you have all the relevant academic degrees from all the top universities, all the relevant work experience from all the right companies, you still may not get funding. The entrepreneur/ VC relationship is a marriage of sorts in that you will be working closely with your VC (some more closely than others) for an extended period of time and VCs must want to and enjoy working with you. I’ve seen hugely successful entrepreneurs essentially ostracized by the venture community after having developed a relationship of being too difficult to deal with.
This last criteria brings me to my final point. Even if you satisfy all of the aforementioned criteria by anyone’s definitions, you still may not get funding for a couple of reasons. Objectively, despite the public’s perception to the contrary, there is actually a finite about of money that any one fund will invest and your investment opportunity will not be simply measured in a vacuum. VCs see a ton of opportunities and often decline to invest in companies they actually think would be good investments in favor of those opportunities they think are better. Subjectively, I’ve seen VCs turn down investments simply because they didn’t like the people personally. I know it may be hard for many of you to imagine this, but VCs are people just like you. As such, we each have our own idiosyncrasies, ideologies, and sector preferences that we bring to any table we sit at.
In conclusion, hope is not a strategy. If you want to obtain venture capital, spend the time to understand these criteria, do a little planning, and work hard to present your investment opportunity in the best possible light. Happy venturing.
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