How do venture capitalists (VC) assess a potential startup?
Every initial strategy session with our clients begin with direct research and insights into who the CEO and founders are. What’s their “why” for even starting the business. Everything the business is and is not, starts with the people on the front lines.
Venture capitalists are no different.
A competent CEO is important in the overall impression of a company. More important than what idea you are presenting is how you present your idea. Don’t fool yourself. Any investor can look through a pitch deck or do a Google search to see an opportunity for profit and in the end withhold funding after meeting the CEO or founder.
At the end of the day, startup companies go through highs, lows and major pivots.
VCs want to make sure they are betting on a horse that can make it to the finish line, let alone win the race. The personality of the founder(s) and their team is a very important factor when investors are considering a startup company to bet on.
The risk is huge and they want to know you’re worth it.
Do I want to invest in this founder?
Venture capitalists invest in people.
When they meet with you during a pitch or anytime before investing, it’s not because they want more information about the company.
A printout can tell them numbers and profitability.
Investors seek this time with their prospective investment because they want to know who they are working with.
Does the founder know their business?
While every situation requires a specific approach, there are characteristics a VC looks for in a founder during a pitch.
Do you know your business model? Competitive advantage? Size of the market opportunity? Can you see the challenges ahead?
If your answer to these questions is anything short of “yes”, gather your team and go back to the drawing board before asking for any amount of investment. Be brutally honest in your own assessment.
Investors don’t put money into a business just to keep it running until the world wants to pay for the product or use it. Imagine developing a mobile gaming app in 2005 when the iPhone didn’t launch until 2007.
Anyone funding a startup will want assurance that as the leader of the company, the founder knows the ins and outs of their industry.
Is the founder a leader?
Startups don’t need managers. They don’t need supervisors. They need leaders.
Adversity will strike at any stage. Many startups are built in uncharted territory that has yet to be discovered or cultivated.
In less than a decade, Uber inverted the fear and overall trepidation of getting into a strangers car and giving them personal information like your name and credit card details. Now valued at over $11 billion and servicing 110 million users worldwide, Uber has paved the way for the sharing economy to permeate peer-to-peer services.
The leadership team must be able to take a startup from its idea phase to a profitable business model.
Investors rely heavily on intuition and personal judgment, but the biggest indicator is in observing the actions of team members around their leader/founder. Does the founder display rude, sexist or racist behaviors?
When the CEO is seen as strong, capable and someone worth following, a venture capitalist feels more confident that they will be able to guide their teams through difficult times when they inevitably arise.
Am I a partner or cash cow?
Don’t expect to get a check after the first meeting.
Investors want to be a partner in the business, not just a line of credit. Understand, this is a long-term partnership. It is important that founders display credibility and trustworthiness beyond the fundraising process.
Don’t expect a VC to help patch every hole in the company either. If you want investors, you need to have a plan of action that would have been applied on the chance that you had no funding.
Of course, VCs will help where they can. They want to see you win big. But they are not employees. Establish their involvement and understand the areas they may be able to help: recruiting, product testing, equity, strategic assistance, etc.
Founders play the largest role when it comes to acquiring investments for their startup. It’s not simple to build a successful venture-scale company. The risks are high. If a venture capitalist doesn’t have a real connection with the founder, it’s an easy pass.