How VCs Evaluate Startups: Part One
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Raising from a VC can be a repetitive, ego-crushing, and worst of all, opaque process. So here’s the cut-the-BS, transparent blog series on the criteria that I use as an investor when evaluating a potential investment, and founders can hopefully use this as a resource to navigate when, where, and which investor to focus on throughout their fundraising process.
This post will focus on the initial “top-of-the-funnel” stage when evaluating a Seed or Series A startup.
It helps to get in the mindset of a VC. We get paid to say “no” — our job is to find the top 0.1% of the startups since we know that startups get outpaced, outnumbered, and outfunded by both new entrants and incumbents players. We need to triage the bottom 80% of the startups quickly so we have the time to dig deeper into the top 20% of the startups more thoroughly.
1) First triage: The fund’s thesis
Most VCs have a specific strategy or thesis. For example, Romulus Capital invests in B2B enterprise in big sleepy industries (e.g. healthcare, construction, logistics, O&G) or commercialization of science (e.g. “deep tech,” Ph.D founder) in Americas and Europe. Very rarely will we make an exception. By specializing, we can apply our learnings from one company to the next while building our differentiation as investors.
These theses aren’t secrets; they’re pasted all over the VCs’ websites. As founders, spending the initial 2–3 minutes to familiarize yourself with the “mandate” will save you the 20–30 minute dead-end conversation with the VC, who won’t have the thesis to invest in your type of company, no matter how much they like you (or your idea).
2) Second triage: Heuristics around your startup’s value proposition
Great, if you’re within our thesis, I’ll pull up your website to try to figure out what problem your product tries to solve. There are snap judgements that are being made in this phase. VCs will literally see dozens of pitches, websites, startups every day — and each pitch serves as a data point in a dataset of their understanding of the startup universe. More often than not, during this first stage, VCs will apply heuristics to pare down the candidate field:
- If you are solving a pain point that the VC doesn’t believe in, they will pass.
- If you are too similar to a company they recently passed on, they will pass.
- If you are one of the many undifferentiated players within a crowded space, they will pass.
- If you don’t fit into their thesis about the world, they will pass.
Of course, the positive versions of these heuristics will give you a boost in securing that first meeting with the VC. For example, if you happen to be solving a pain point the VC truly believes in, they will make sure to spend that extra time to dig in.
3) Third triage: LinkedIn, Your Online Resume
One thing that VCs look for is a high-quality team. To do this efficiently, I utilize LinkedIn, where I can quickly pull up 2–3 of your team’s founding members/C-suite. Then I begin piecing together your story. What, where, and how long did you study? Where did you work? How did you progress? How did you meet your founders?
All of this leads to answering one question: How compelling is your reason for solving the problem that you’re trying to solve?
For example, when I look at B2B enterprise, I’m oftentimes looking for a team who has risen through the ranks of the industry combined with a technologist who is bringing highly differentiated tech. I will never know until I chat with the team, but my guess is that the industry veteran is able to identify a real pain point for which the tech vet is able to engineer a solution.
On a smaller side note, pedigree holds weight (ie. school, brand company name, previously successful startup). During this early process, when I need to get through a lot startups, it serves as an imperfect heuristic that can typically serve as flags of interest.
Finally, if I’m on the fence, I triangulate on the quality of the team by seeing the quality of talent the founders attracted for their “first hires” (i.e. VP of Sales, Head of Engineering). Top players gravitate towards top players. If an exec from a high-paying job at a well-established firm was willing to leave his/her job and put it all on the line for you as a founder, that speaks volumes about your caliber as an entrepreneur and the belief in your mission.
Conclusion
A frustrating takeaway for new entrepreneurs is that it’s hard to prescribe actionable steps to increase your odds at the “top-of-the-funnel” stage. All of this triaging will happen before we chat. It’s likely unfair that so much has already been analyzed before you’ve had a fair chance to present yourself, especially since founders pour their souls and savings into their startups.
In defense, I think the best way to frame the situation is that the triaging will save both the entrepreneur and the investor a lot of time and soul — neither of which are in infinite supply for founders. For entrepreneurs, they should concentrate their limited resources on investors with realistic chance of funding them.
One last personal note: always always fight the good fight. Being a founder requires infinitely more courage than being a VC. I sincerely believe that being a founder is one of the bravest choices that anyone can make, regardless of what some random VC thinks of you.
Keep on hustling, and see you at the top.
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UPDATE: Btw…here’s part two of the series on what you do once you get the first meeting.
