Competition for attention and funding from VCs is tougher than ever. With more startups launching (and over 90% of them failing in the first 18 months), VC’s must be diligent when investing. This blog post is intended to provide you with insight to what VCs are looking for so you can maximise your chances of securing funding based on interviews with some of the best VCs in the world.
To understand what VCs look for in a founder, I combined seven podcast interviews across five high end venture capitalists including:
- Benjamin Chong, Right Click Capital (AU)
- Charlie O’Donnell, Brooklyn Bridge Ventures (US)
- Laurel Touby, Supernode Ventures (US)
- Nihal Mehta, Eniac Ventures (US)
- Tim Draper, Draper Associates (US)
1. What is The Market?
The market the founder is playing in is perceived as critical to its success, and rightly so. The size of a market and its potential reach (national vs. international) is a huge factor in attracting the right investor, as it demonstrates the maximum size a startup can grow to before it needs to offer new product or service offerings.
“We like founders who are going after large markets”, Benjamin Chong shared on the podcast. Large markets naturally increase the likelihood of success.
A great question to ask yourself to determine the viability of your startup is:
If I am able to service 1% of the total addressable market as customers, what revenue does that translate to for my startup?
2. Do The Founders Know The Market?
The founders need to intimately know the markets in which they operate. This is not to be mistaken with founders who previously worked within the industry they are attempting to disrupt.
Let me explain with an example.
If you’re aiming to disrupt the accounting industry, and have never worked as an accountant before, this shouldn’t be a deterrent from starting a business in this vertical. In fact, some studies suggest having not worked in this industry before provides a more holistic view of the industry that enables disruption to take place. Such was the case with Rod Drury, the founder of Xero, who despite studying accounting at university, has never worked as an accountant.
In any case, you need to have an intimate knowledge of the industry you are aiming to disrupt, otherwise you will lack the required insight.
3. How is The Startup Doing Right Now?
Some signs that the business and founder/cofounders are progressing is important too. Approaching a VC firm with an idea and a pitch deck is insubstantial, and always has been. Some assets that demonstrate value at this stage include:
- Letters of intent from potential customers
- A prototype or minimum viable product
- Paying customers or registered users
It doesn’t matter if there are no customers yet, but VC firms need to see that there is potential interest from the market if you want them to be willing to invest in your startup.
For instance, I’ve worked with startups who have raised capital from letters of intent from potential business to business (B2B) customers, and no actual product. That said, having a product tends to attract a much higher valuation.
4. What is The Founding Team’s Track Record and History?
The startup community regularly states that a startup’s success is governed by 10% idea and 90% execution, so it’s obvious why the team is so critical for a venture capital firm.
VC firms love founders with a former track record. However, a strong track record isn’t always critical. Nihal Mehta shared with me that he’s happy to take on founders that have exited unsuccessfully, or are in a state of mind where they’re really hungry and in a tough position financially. He used the example of founders who are either renting their home or have a mortgage as being more desirable due to the personal financial pressure they have, which aligns with the financial pressures of a startup.
What is critical is a history prior to your startup; whether it’s emerging from formal education, working as a freelancer, or in a large corporate setting.
The story of the founding team is vital for two reasons:
- It will become the story of the startup that is eventually used to acquire customers.
- It demonstrates why the founding team have drive to make this business succeed.
Reputation is also important, so don’t rush past the details. If you have skeletons, don’t leave them in the closet, as they will become known (and it’s better they come from you rather than an internet search).
5. What Reach Do The Founders Have?
I spoke previously about the founding team’s track record, and while this is important, having a personal brand is a huge tool to enable a successful capital raise.
Founders are begging venture capitalists for their time so they can pitch for funding. But, consider reverse engineering your chances by publishing great content pertaining to your startup and the field you’re in.
I spoke with Charlie O’Donnel on my podcast, who said “I don’t think founders spend enough time building up a reputation as the expert in their industry to the tech community”. In order to secure funding, it’s extremely helpful when you’ve made a name for yourself in the eyes of the VCs with your content first.
Scenario A
You put your head down and work on your startup, then appear on a venture capitalist’s doorstep asking for money. They have no idea who you are, and you now need to tell them who you are, what your startup idea is, and why you’ll succeed.
Scenario B
You work on your startup whilst building a personal profile. You establish a podcast, guest post blogs for startup websites, and speak regularly at startup events. You appear on a venture capitalist’s doorstep asking for money, and they remember you from an event two weeks prior.
I don’t need to tell you which has a higher success rate.
Charlie said he’s looking for people who will give him a strong shot at success. He said, “If I only invest in 10 out of 2000 things in a year, think about how knowledgeable those 10 are about their spaces. They are the people to talk to about that. So the bar is very, very high and you need to show an investor that”.
6. Are The Founders Hungry?
“…And I mean literally hungry!”, Laurel Touby.
Venture capitalists, contrary to popular belief, have the same troubles as you. Two eye opening lessons to consider before you pitch to a venture capitalist are:
- The venture capitalist needs to pitch your idea to their investors, so they want you to convince them your startup is great so they can convince their investors that their portfolio of startups is strong.
- Many venture capitalists have been founders before, and are viewing your pitch through the lens of their own experiences. They have not only seen the struggles of a startup first hand, but they have lived through every win and failure of their investments too.
If a venture capitalist cannot quite literally hear the hunger in your voice while you pitch, and the drive is not immediately apparent, they will steer clear of the startup as they know you need that drive to succeed.
Benjamin Chong shared “What we like are founders with some background, some tenacity, and a real passion for what they’re doing”.
Venture capitalists aren’t gamblers.
They are investors.
Give them an investment.