What Do VCs Look For?

Over the past couple of years or so, I’ve been coming across great ideas with bright minds that are certainly redefining the startup community in Kuwait and enriching the ecosystem we all work in.  As they learn, build and measure their startup’s progress, smart money becomes key to scaling up and regionalizing their business.  Despite their commitment and excitement, I realized that the lack of venture capital “VC” exposure to local startups leaves a fundamental gap in preparing local startups for venture money.  This post was prompted by a few conversations I had with local startups over the past month as they were shopping for an angel round. Here are key questions to think of while building your startup that will hopefully shape how you position your pitch to VCs once you’re ready for their money.

 

What do VCs look for?

 

  • Trust – How well does the VC fund trust the principals? Can VC work with them? How long have they known each other, worked together and why are they working with each other?

 

  • Team – Does the team have complimentary skill-sets? Do they communicate well with each other? Are they enthusiastic or is this a lifestyle business for them? Is there a blend of corporate and start-up experience in the team? Does the VC have references on the team from people the VC knows well and trusts?

 

  • Mentorship – Has the team gone through an incubator? List the team’s advisors/mentors and what side of the business did they impact most?

 

  • Returns – Possible VC return on investment “ROI” of 20 times in 5 years? Will the startup be cash positive in 18 months? Who’s leading the funding round? Follow-up funding required? When and what size?

 

  • Revenue and Market Share – Is the time required for significant revenue increase far away? Does market share come quickly or slowly? How will you grab market share?

 

  • Market – What market are you in and how big is it (history and projections)? How well do you know your market? What key suppliers/customers can you reference for a quick call? Who are your competitors? How do they compete with you? Market/product momentum

 

  • Product – What is your value proposition? Is the competitive advantage sustainable? Are there market barriers? How durable are they? How much has your product evolved and over how long of a period?

 

  • Customers – Describe your typical customer? Walk us through a transaction. Do you currently have a paying customer?

 

  • Barriers to Entry – How do you prevent someone with bigger pockets from offering the same product? How sustainable is your barrier to entry?

 

  • Cost – What is your costing structure? Does the startup have a cost structure significantly better than competition?

 

  • Profits – Does the plan focus on profit or on product development? (cash flows equal to returns, inventions fill history books)

 

  • Investment proposition – Funding round, size, equity offering, breakdown of investors by category, key terms, proceeds use

 

  • Skin in the Game – Does the management team have a personal financial commitment of their own net worth? What is there for you to lose if you close shop?

 

  • Geography – Is the start-up within 1-hour drive/flight from our money? How friendly are the logistics to taking a trip to your startup?

 

  • Exit Strategy – What is your exit strategy? Clearly spell it out

 

  • Risks –What risks your startup may encounter and how will you address them?

 

Although due-diligence on IP/technology validation is an important box to check, it usually comes post checking all the boxes highlighted above.  I certainly do not speak of all regional investors in MENA, but smart money for startups typically focuses on four key aspects when evaluating an opportunity: Team, product/market, momentum and returns. VCs more importantly invest in game-changing startups that can potentially deliver astronomical returns; if you’re not a game changer, don’t ask for VC money.

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2 Comments

  1. Awesome post buddy. Seriously, great post. I agree with everything you said, except for one point that I strongly disagree with. The point about the Exit Strategy. There is a great post in Forbes “Successful Entrepreneurs Don’t Have An Exit Strategy”:

    http://www.forbes.com/sites/groupthink/2012/06/18/successful-entrepreneurs-dont-have-an-exit-strategy/

    The founder of company should build his startup to become a sustainable business not to make it sexy for acquirers!! Imagine that from day one I’m building my startup to make it fit the type of companies that Expedia acquire for example, before making any decision I’ll be thinking, is this something Expedia will like to see!! In that case I’ll be focused in fulfilling their checklist instead of focusing in creating value to my customers!!

    Reply
    • Thanks for highlighting the exit point Abdullah. There are obviously weights to each point a VC looks for and I tried capturing the more important ones in the last paragraph (team, product, momentum and returns). With that said, exit from a VC standpoint is different from the principals; VCs need to return money back to their LPs with a clear route to how will they do so. From an entrepreneur’s perspective, I would second your thought on the same.
      Cheers

      Reply

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