The Well Known Secrets of the VC world (Part 2)

OK, it took a while since part 1. It is kind of busy here in Project-X and weekends are the only time left for some writing. Before it gets too far from my VC days, I wanted to write the promised (but perhaps not anticipated) part 2 of my post, and get it out of the way. The last post covered some basics: What’s a good VC, getting meetings and the strange habit of VCs not to pass on deals. Today we will focus on what’s important- what will a VC look into when  meeting you. Before we get into details, let’s talk about drawers. VCs employ people that need to decided between many bad companies and few good ones 5 days a week. This is why they all have a mental filing system and if your idea can not slide comfortably into any drawer, your chances of getting funded are much slimmer. Like I heard from one venture guy:

“Don’t come first with an idea, but don’t be the tenth as well. If you are first, you will fail the pattern recognition test. If you are tenth, you will slide into the drawer of: “there are too many of this already”.

So, what would VCs look at:

  • Market size: Your idea must go after a big market that can be quantified. Many entrepreneurs will make the mistake of telling the VC that they are going to create a new category. This is the fastest way to never get your phone call returned. Try to figure out which money will you attract, and use it to define the market you are after. For example, if you are developing a Wii alternative for a gym, you can claim taking share from the video game category and of the fitness category- both large markets. Why is it important? Because even the most successful company in a small market would not make a great exit.
  • What’s the team: So you have the right market- now who is going to take the market over? VCs care a lot about the team. Proven CEOs  will get a huge premium and VPs that came from successful companies in the same space will increase your chances of getting funded. If you develop a travel site, you may want to bring along coupe of ex-employees from Kayak, even if they were not the most senior there. Why is this so important? The deadpool is full with companies that had great ideas in the right market and a team that messed it up.
  • Follow other people tracks: If companies in your space or that have similar business model had great exits- you just got yourself a big plus. It is so much easier to explain your exit strategy with some examples like: company X was bought by Y for 450M with only 17M in revenue…
  • Make it big: give a VC two options: a company with 50% chance to be sold for 50M of a company with 5% chance to be sold for 400M. The math and normal judgment will make everyone choose the first one as an investment target. Nevertheless, VCs tend to swing for the fences, so if your idea is safe but small, you may want to search for alternative funding.

There is much more I can write but I leave some to part 3… feel free to share your stories or comments…

The Well Known Secrets of the VC world (Part 2)

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