The maze of decision making in VC
VCs lack transparency for sure, especially, WHY they make a specific decision. Some startup founders are often very frustrated with the process of raising money from investors. One major reason is because, what investors look for at an early stage can be very counter intuitive to assumptions founders have. Some founders pitch profitability, risk-free but slow growth, and are puzzled when investors pass.
Early stage startups have high risk and high reward, resulting in a power law distribution of returns for investors. Investors at the top of this power law believe the way they evaluate startups is the key to their success. Potential to be be successful, or even really successful, isn’t good enough for top investors. Founders need to show that you have a truly huge opportunity. What might help entrepreneurs and founders? Role play. Just switch roles and think about just three major and most important parameters, you would like to focus on as an VC. Investors look within the following 3 parameters when evaluating a startup’s true potential:
“Data tells us the ultimate size of market addressed is the single greatest determinant of outcome” - Andy Rachleff, @arachleff.
If the market is not at least a multi billion dollar opportunity in 5-10 years, you may want to work on a bigger problem, if you want to raise significant amount of money and attach yourself to a very strong VC network.
“If you don’t have a winning product [or service], it doesn’t matter how well your company is managed, you are done.” - Ben Horowitz, @bhorowitz
As a founder, you need to show 1) any evidence of product or market fit and 2) forms of unusual or disruption in your product approach.
“When a great team meets a great market, something special happens.” - Andy Rachleff, @arachleff.
As a founder, you need to be obsessively curious in how to serve your customers better, have bold thinking in your plans, and be authentic in the problem you are solving. To solve this, you must be able to deliver operational and adaptive excellence, aka complementary team or as solo-preneur a jack of all trades.
Further information on frequent errors between founders and VCs.