What Venture Capitalists Want
By John Platt, recently published on IEEE-USA’s Insight.
Almost every engineer who comes up with a great idea has a similar dream: to get funded by a venture capitalist who will help to make their startup a success.
But if the chance to present your idea to an investor happens, will you be ready? Do you know how to sell yourself, your technology, and your plan in a way that will get you funded? Do you understand what that investment will mean for you and your company?
Unfortunately, according to insiders, many people who set out to talk to investors simply aren’t ready. They have the wrong information inhand, or the wrong selling points, or inappropriate expectations of how the whole process works.
With that in mind, here are a few answers to the most important startup question of all: what do venture capitalists want?
The Right Team
The first thing investors want, right off the bat, is to get to know the team in your company.
“Any time I write a check, any money that’s invested in a company is really going towards one thing, and that’s people,” says Diane Fraiman, a partner at Voyager Capital in Portland, Oregon.
Fraiman says she’s interested in understanding founding team’s domain knowledge, their expertise, and whether or not they’ve done this type of thing before.
It also helps to illustrate just how close you are to the problem you’re trying to solve with your startup. Lauren Kolodny, a principal at Aspect Ventures in San Francisco, calls this “the alignment between the founding team and the pain point.” This shows that they understand the end-user to whom they’re going to be marketing their product.
Kolodny says the team is a vital part of the startup’s story, which is an essential part of the way the company can be sold to investors. “If you have a really strong team that knows an industry well, along with that pain point, tell that at the beginning,” she suggests. “Really demonstrate that from the beginning because it will make the investor more interested from the outset. That means they’ll listen more closely and ask more interesting questions.”
Fraiman says personality also matters. She’s looking for “somebody who’s very self-aware and sort of has their ego in check.” She acknowledges that any entrepreneur in an early-stage startup needs a certain amount of ego and guts and broad shoulders, but you also have to be willing to admit what you don’t know and have the abilities to listen to others, ask for help, and accept assistance when you need it. “Lack of self-awareness can be a real show-stopper,” she says.
The Right Company at the Right Stage
Beyond people, the nature of your startup matters. Fraiman says she may look at 100 companies only to make a deal with just one. “That doesn’t mean the other 99 suck,” she points out. Some of them are just in industries outside of her expertise. “We don’t do medical devices or biotech or consumer products,” she says. “They’re just out of our scope.”
Other companies might be at the wrong stage in their development for a particular investor. Some investors provide seed funding, while others specialize in early or later-stage funding. Talking to the wrong investor at the wrong stage of your company’s development may be a quick way to get a rejection.On the other hand, just because you’re wrong for an investor at one stage doesn’t make the doors to her office permanently close behind you. Instead, that first meeting could lead to a long conversation. Fraiman says there are many companies she has followed and talked to from their earliest stages until they were ready for investment later on—sometimes years later.
A Novel Solution
Obviously a startup’s technology and solution matter. “We’re looking for smart people, the technologists who come up with an innovative idea and try to disrupt the market,” Fraiman says.
Again, though, this comes back to the people behind the startup. “I think sometimes founders almost depersonalize their pitches because they’re trying to hit the business points,” Kolodny says. “If you’re someone who really understands a problem and that’s what’s motivating you to solve it, tell that story because that’s where your passion comes out. That’s where someone who’s looking at you starts to ask, is this person hungry enough? Are they going to succeed against the odds?”
Although your solution matters, don’t focus too much on the nuts and bolts in your first meeting with a VC. “There are early pitches where all they want to do is basically get down to the engineering code,” Fraiman says. “You know what, that’s not really the most important thing to me right now.” She says that they always perform due diligence on anything they are considering, and that includes test-driving the technology. “Either it’s going to work or it’s not going to work,” she says. “That’s actually the easiest part of due diligence.”
An Understanding of the Market
What’s more difficult to prove than the technology, however, is that you know where it’s going to be used. “The hardest part of this whole exercise is once you build it, what are you going to do with it,” Fraiman asks.
“’Build it and they will come’ is a really bad strategy,” she continues. “What wins is outstanding go-to-market execution combined with a really, really disruptive solution.”
At this point, it is essential to provide an understanding of the competition you might face in the market. If there are too many other players in the field, for example, there may not be a market for you. “It’s hard to disrupt a market where there are a hundred other people who have disrupted the same thing,” Fraiman says.
Similarly, if you’re the first company in a market, you might want to ask why that is. “If there’s no competition, it could be that there’s no market,” Fraiman says. “We want competition. We want there to be other investors in the market. We want there to be some energy and spark in there.”
Your Strategy for Their Money
In addition to your marketing strategy, investors want to know how you’re going to spend their money, and why their money matters. Kolodny says they like to see presentations that lay out a forward path, something along the lines of “If you invest with us, we’re going to be able to do X, Y and Z, and those three things together are going to allow us to achieve these certain goals and milestones within a certain time period.”
“You’d be surprised by how many times people have that first part in there—here’s what they’re going to do with the money—but haven’t really thought about where it gets them,” Kolodny says. “Good investors will try to tease that out, but you as a founder will look a lot more thoughtful and goal-oriented if you focus on that up front.”
A Long-Term Relationship
Your relationship with an investor doesn’t end the day you cash the check. Instead, you’re now teammates in a process that could last for years.
“This is a very long marriage,” Fraiman says.
Sometimes that relationship starts before the investment, with an introduction. Fraiman says she gets a lot of referrals from lawyers, accountants, and other entrepreneurs who point startups her way. That helps to establish a trusting relationship which will last for a long time once a possible investment goes through.
After that, an investor is often looking years ahead. “Our approach, as investors, is we plan to be a partner with these companies, in some cases for 10-plus years,” Kolodny says. “That’s who we want to be.”
A Return on Investment
Of course, all investors want to make a profit in the end. “We’re absolutely thinking about the potential for returns,” Kolodny says. Even in the earliest stages of a company they’ll look to see if a startup already has a small group of paying early adopters who are actually getting real value from the product. They’ll also look at how much it will cost to acquire additional customers, what kinds of referrals you’re getting, and what contacts you have in place to start making more sales.
Ultimately it all boils down to everyone making money from a successful company. But as the investors point out, that’s just not possible without everything that came before: the people, the solution, an understanding of the market, and a trusting relationship. That’s what venture capitalists want.
John R. Platt is a freelance writer and entrepreneur, as well as a frequent contributor to IEEE-USA InSight, Scientific American, TakePart and other publications.