What VCs want to see in a startup?

VCs prospection, at early stages, is like “Tinder hunting”: they look for the beautiful tall blondies, <25 years old, single, that attended good schools, successful, but not so independent to the point that they won’t need you… You can apply the same concept to men (tall, strong, 6-pack ab, successful, mysterious, excellent cook, help in the house chores, who want to have 3 kids…).

It’s sounds superficial and, to a certain point, it is. But, when you receive thousands of pitches, you need to establish more objective criteria so you can filter out the companies less likely to succeedYes, the first filters are not about finding good companies, but eliminating the potentially bad ones.

 

What’s the ideal startup profile for early stage VCs?

Understanding the ideal types VCs look for is crucial, so you can adjust your speech and tackle those initial weaknesses.

VCs tend to like the following characteristics:

Founding Team

  • 3-4 cofounders, < than 30 years old, with deep technical expertise and strong domain/ industry knowledge.
  • Founders should have worked before, in other projects, for at least 2 years, and must be 100% dedicated to the company.
  • Capital structure should be clear and formal, with balanced division of equity among founders. Any founder too diluted at early stage will end up with nothing down the road.
  • In terms of diversity, interesting enough, there’s a lot of movement to boost startups with female and minorities founders. That’s great, and you should take advantage of that if you can. Age-wise, though, I still see a lot of prejudice.
  • No freelances/ outsourced resources – if the company employs someone other than founders, make sure they are regular employees.

 

Market & Model

  • Product must tackle a consolidated market, with incremental evolution – deep innovation/ revolution is a harder sell.
  • If you’re not in a leading geography (US and, maybe, UK), VCs will prefer copycats. They usually don’t take geography and business model risks at the same time.
  • Scalability is the magic word: growing 10x shouldn’t require more than 2x more employees
  • Billion dollar markets: forget about small wins.
  • Exception is when a clear and shot term exit could be in sight – for example, your technology being acquired by a much bigger company.

 

Stage and Track Record

  • Startups should be less than 1 year old, and have raised some angel financing.
  • Product must be ready, at least its core. No buggy MVPs…
  • If makes sense, having some patents filed increase your value.
  • Company should be operating, generating (some) revenue, and growing at least 20%-30% MoM (month over month), no matter if you’re burning cash on each sale.
  • Actually, growth is the most important variable early stage VCs look at. Some companies even postpone launch, trying to to generate a “backlog” of users, so they can manage growth in batches. That’s the case, for example, with companies pursuing pre-registration or closed betas schemes.

 

What should I do if I don’t fit within the ideal profile?

As with our dating life, compromises need to be done. Some more than others… VCs know that, and are willing to make some trade-offs. But you got to help them out… There are some strategies you can follow, and I’ll write articles for each, but just as a teaser:

  • If you’re a single founder, get formal advisors who can challenge you. Also, have very explicit processes and back-up plans in case something happens to you
  • If your team lacks specific profiles (because you’re out of cash), you should interview and have the potential candidates lined up (including compensation), so when money comes you can just hire them.
  • If you don’t have technical background, hire someone who does. You should hire someone with deep technical expertise. If you cannot afford that, hire someone not so senior (and cheaper) and a technical lead part-time. Or have a very hands-on technical advisor.
  • If you don’t have a working product, make a prototype that people can navigate (you can do this even on Power Point or Excel). Invest on quality design from start!

 

The list goes on. Understanding what VCs want is crucial for you to understand what your company lacks, and how to compensate that. All in all,we all choose the perfect picture for our profiles, don’t we?

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