How Venture Capitalists Decide What to Fund
What do venture capitalists look for in a startup?
In a recent article by Arianne Cohen in BloombergBusinessweek, Cohen shared the responses of six different venture capitalists to this essential question.
For Adele Oliva of 1315 Capital, it was great leadership teams. For Tony Grover of RPM Ventures, it was the relationship the VC firm builds with the entrepreneur-founder. For David Cremin of DFJ Frontier, it was the entrepeneur-founder's level of passion.
No surprises there. But the next three VCs gave responses you don't see everyday:
- Dan Borok of Millennium Technology Value Partners said that his firm conducts "many months of primary research to identify where value will be created and which companies are best positioned to benefit."
- For Alison Wagonfeld of Emergence Capital Partners, a key was the potential level of regret. "'I ask myself, 'How will I feel in a year if I pass on this opportunity?'"
- Jodi Sherman Jahic of Aligned Partners said she looks for "ecstatic customers," especially when those customers "can quantify why they are so happy with a meaningful business metric."
Okay. So now that you know all of that, are you going to change your business model, your top team, your body language, or your customer outreach?
Before you do, evaluate your deep-down, innermost reasons for being in business. Is venture capital so crucial to your quest, that you'd consider changing the DNA of your young organization in order to receive it?
Nowhere in the rules of business is it mandated that VC money is the only way to go. There are many viable business reasons why it might not be best for you or your company. If you really need the funding, there are plenty of alternatives. Think hard about whether the main reason you want VC money is because of the glamor and validation attached to it. The sexiness factor is important to certain founders. But that doesn't mean it's the best thing for your company's long-term interests.
If you decide VC money is a fit for your business, there are blueprints you can follow, to make your company more attractive. Larry Kim, founder and CTO of WordStream, has shared four lessons he's learned from investor rejection letters. One of them was to use the rejection as a basis to start a relationship with the VCs.
"A full year after I came *this* close to telling the lot of them off, I started hitting reply to those rejection emails," Kim writes. "I updated them on my progress with the business and asked for a chance to show them how far it had come. Almost all of them took the meeting request and many were amazed to see how far I had gone, bootstrapping on my own."
Finally, remember that different investors (VCs or otherwise) prioritize different criteria. For example, did you notice that none of the above mentioned the size of a startup's market, price points, purchasing frequencies, or potential market penetration?
Yet all four of those things are crucial to your company's success, both as a potential investment and a long-term entity. In fact, in his just released book The First Mile, innovation guru Scott D. Anthony, an expert when it comes to launching disruptive ideas, specifies that all four of the above are essential to an idea's potential monetization.
So by all means, pay attention to what VCs are looking for. Just don't reinvent the wheel in an attempt to seem more appealing to them. If you've got what they're looking for, they'll find you.