So, you’re trying to land a meeting with a venture capital (VC) firm or your prominent potential investor, or maybe you’ve already dazzled them with your marketing deck, and they want to get on a Zoom call or (gasp) an in-person meeting. What do you do? What do VCs want?
Every VC and firm is different. They all have their formulas of what works (and doesn’t). Everyone has a story about how they missed investing in Facebook, Uber, Google, and so on. (I missed out on an early investment round of Twitter). But, at the core of all investors is one thing — a desire to fund a company that is most likely to succeed. Success is never certain, but there are several things to consider when VCs are looking to gamble.
I’ve worked a lot with VCs, investors, and founders in my three years doing venture capital. Most of the companies I’ve backed are not close to an exit, and there have been some early casualties. While it sometimes (very rarely) happens sooner, big exits for investors often take 8 to 10 years. To get huge multiples, VCs have to be as early as possible. Early is when an investor receives the lowest valuation and has to tolerate ridiculous amounts of risk and failure. Professional VCs do not focus on the actual failure rate (often between 70% and 90%) but ensure that the most significant gains make up for the losses.
A Great Team
Nearly every article and VC says the most important thing to invest in is a good team. This is only half the truth. The best team is vital to winning no matter what game (or business). Most VCs will value a team strongly because often, the only measurable thing is the team, experience, and an early-stage product in the early stages. You need to have strong leadership abilities and make good decisions. Passion is paramount, as is industry experience and the ability to rally a team below you. Speed of execution is really important, VCs have low tolerance for excuses and slowness.
Market Opportunity
While timing and luck are formidable contributors, the actual test of any new start-up is how well a team disrupts an existing market or captures a new one. This is why it is vitally important to prove that the market wants the product or service you are building. It is common for start-ups to solve problems that are either too small that they are not profitable or a big problem with a poor solution that fails to capture the existing market. Therefore, proving revenue potential or having big companies as paying clients early is a really good indicator that the startup is onto something. If a company is not capturing an existing market or disrupting an existing one, it does not matter how good the team or solution is; it will fail.
Crazy but not too Crazy
VCs are looking for crazy but not “too crazy.” A while back, Ashton Kutcher said the same on the set of Shark Tank. He wanted to invest in people and ideas that were this side of crazy. The reason for this is because if a good idea were so obvious, someone (or some big company) would already be doing it, and the opportunity wouldn’t exist. A good idea for a start-up is inherently bad for a big, established company. Start-ups are scrappy, highly competitive, and challenge the status quo.
Looking to Help
Founders often are so focused on getting funded that they forget the value an intelligent investor brings to their venture. Counter-intuitively, “smart money” investors seek to bring much-needed capital to a venture to get a return and want to influence the business directly — which helps everyone involved. The primary ways a VC can help your business include strategy, finding additional funding, finding new customers, networking, consulting and mentorship, and helping to hire talent.
They want a unicorn that is genuinely a unicorn.
While there aren’t many unicorns in Adult, according to a 2017 study, investors overwhelmingly believe that most unicorns are overvalued. Upwards of 90% of investors believe that those billion dollar companies aren’t worth it — but at the same time, less than 40% have invested in one. Investors want to invest in the next billion-dollar company and downplay the ones they miss.
