“How did the meeting go?” I asked the Founder.
“Well, he seemed quite interested” came the reply. “However at the end he said he was not comfortable with this technology and is going to pass”.
Something didn’t make sense. I knew the VC well, knew he liked this particular space, and made the introduction on that basis. I expected him to suggest at least a follow-on meeting. So the next day I gave him a call. “I heard from the Founder that you passed. Curious to know why, so I can better calibrate to what you are looking for”.
“Chris”, he said, “I really appreciated the introduction. I liked the problem he was solving, the solution, and the high margin business model. I also saw great signs of customer traction. You were spot-on in bringing that deal to me”.
Then his mood turned thoughtful. “I might miss a great one here”, he started slowly, “but I passed for an important reason: the Founder does not understand my business”.
He continued, “an early stage investment is like a marriage: both sides commit to know and support each other. I make a 100% commitment to learn a Founder’s world: their customers, market, solution and financing needs, team, milestones – everything. When things become rough, we will need to trust and understand each other. I just did not feel he understands my world of early stage financing. So I passed”.
His comment stuck in my head over the next few days. More importantly, I began to see this from the Founder’s point of view: he had no idea what the VC really wanted to see.
This lead to the broader question: Do startups really understand what investors want to see? What is important to them? Entrepreneurs who seek funding would do well to understand this.
So I wrote a list of ‘What Investors want to see in your idea”. A cheat-sheet, if you will, for startups. Mind you, this is just one investor’s perspective (mine), but I’ve heard many investors echo the same thoughts, so I feel it is accurate. Knowing – and being able to explain each of the questions below, will significantly improve your chances of getting quickly to ‘Yes’ or ‘No’ from an investor (and avoid the dreaded “Let me get back to you…”). That’s already a significant step forward, right?
What follows are 9 areas where investors see risk, each crystallized to three questions
(1) Problem / Need
What is the problem you are solving, or the need you are filling? How urgent is this problem? What evidence do you have that the problem exists (quantifiable, measurable)?
What market(s) have this problem? What is the size and growth rate of this market? How do customers currently solve this problem, and why is this insufficient?
Describe your approach (solution, service, product) for solving this problem. What is your unique insight? What is innovative and defensible about your approach? What benefits does the [User, Customer, Channel, Partner, Market, insert..] realize?
How will you reach the target market? What will it cost (money, time, resources) to reach and service this market? Describe your Customer and Market development activities (very important).
(5) Monetization (business model)
Who do you invoice, and why do they pay? What are your expected margins and the margins for your channels and partners? How have you validated this strategy to date?
(6) Competition and Freedom-to-operate
What competing solutions currently exist? Soon to exist? What barriers could reduce your market traction (competitive, IP, regulatory, etc..)? What is your unfair competitive advantage and how is it sustainable?
What capital have you raised to date, and what milestones have you accomplished? What capital are you raising now, and what milestones will you accomplish? Approx. how much additional capital will be needed beyond this round and for what purposes?
Describe the team and how their experience is relevant. Describe the extended team: Board, Advisors, Investors, etc.. What gaps exist in the team and how will they be filled?
What are the possible exits for the investor? If acquisition, show 5-10 possible acquirers and explain which department would be interested in you, and why they might buy you.
So there you have it. Do you know the answers to each of these questions? Think about it.
Last thought: what is the most important investor decision criteria? Each investor will differ… but I believe it is ‘rate of adoption’. How fast does the market pull product out of your hands? How quickly can it integrate your solution? The rate of adoption directly correlates to your growth rate which directly correlates to your future valuation – which is a pretty important metric for investors.
Helsinki, Nov 2nd, 2012