How VCs Evaluate Startups: Part Two
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This is the cut-the-BS, transparent blog series on the criteria that I use as an investor when evaluating a startup as a potential investment. This post will focus on the first conversation startups have with VCs and what’s actually going through the VC’s mind. If you’re curious about how a VC decides to initiate the first conversation, you can start with Part 1.
What the First Conversation is Really About
They say fundraising is like dating, and the intro conversation is like the low-pressure first date. It lasts between 20–40 minutes, in person or by phone. You get a chance to introduce yourself, your company, etc…at least that’s what it looks like for the founder.
But unlike dating, for the VC, this is about getting to a quick no.
VCs aim to triage the bottom 80% of startups so that they can dig deeper into the top 20%. After the first conversation, I’m looking to say “no” to 70–80% of the startups, which implies that I’m actively looking for reasons to not invest in the startup.
Who You’re Talking to & How They’re Motivated
To understand why the triaging happens, it’s helpful to understand the person you’re talking to. The first chat is likely going to be with an analyst or an associate. They range from fresh-out-of-college to post-MBAs with a short stint as a founder, product manager, or a consultant/banker. They don’t have the check-writing powers, but they serve as the gatekeepers to the partners who do — an important dynamic to keep in mind.
Partners are stretched thin, serving on boards of startups they’re trying to keep alive, managing their investors, while also trying to keep up with other VCs. So they rely on associates to help them direct their attention to the right deals and divert it away from the wrong ones.
For an associate, their value to the firm is tied to finding and vetting deals. Their credibility lives and dies by the quality and quantity of the deals they bring to the firm. That means at this stage in the process, you are one of many potential startups that they need to triage in their pipeline.
But here’s the paradoxical secret: as much as the associates are looking to say “no”, they are also sincerely rooting for you to be the badass startup that they’ve been looking for. Associates want to be your first advocates at the VC firm. They want be the ones saying to the partners, “Hey, I just met this really cool startup, and you need to get on the phone with them tomorrow.”
In my experience, I’ve found the best entrepreneurs have figured out how to work with the associates to build their case during that first conversation.
The Agenda of the Conversation
To work with the VC, it’ll be helpful to hone in on what they’re looking for vs. not. I’ll share the agenda that I personally use 90% of the time. The following is a comprehensive list of topics from which I’ll pick and choose the important ones that are especially pertinent to the startup. The first conversation is about information: be concise, be precise, be measurable.
I want to take a quick moment to emphasize “team”. For startups, companies pivot, strategies change, revenues build, but the founders are rarely replaceable, especially in Seed and Series A. The evaluation on “team” goes beyond the resume. It’s more about you as a founder: how thoughtful you are in your answers, how collaborative you are in your approach to the conversation, how much conviction you have in your thesis.
Of course, not all VCs think alike. Some emphasize the human element while others the more quantitative proofpoints. Every pitch and firm require different prescriptive tips, but these are my personal agenda items that tend to hold true for most VCs you’ll meet in the VC world.
So, be concise, precise, and quantitative. Avoid the fluff or grandiose statements. If you’re truly ready to be funded, you’ll have a lot of substance you’ll need to convey. And the more substance you pack in and less fluff you keep out, higher your chances you might find yourself on second dates with the VC.
Keep on hustling, and see you at the top.