What is Attractive to a VC?

I have been neglecting this blog way too long and it is time to get back in to it. I had a nice reminder by someone today who mentioned that I haven’t updated it for a while. Having one reader was enough encouragement to put a post together!

This is going to be a short one, but answers the question I probably get asked the most by people, specifically entrepreneurs. What does a VC look for in a startup to make an investment?

Here is some criteria and, like most things in venture and startups, they are not rules just some generalizations.

  • Commitment. A passionate and resilient entrepreneur who is completely focused on their startup. This is not a job, but a mission.
  • Inspiring. It is said that each third of an entrepreneurs time should be spent on recruiting, fundraising and setting the vision. All three of these responsibilities involve inspiring people to follow you. You have to display confidence and build trust with everyone around you.
  • Market. You have to be going after a large market. This could be disrupting an existing one, taking the lead in an emerging one or creating a new one. It just has to be large and compelling.
  • Traction. Demonstrable traction working against a hypothesis. If you believe and have built a product to show that people will adopt a certain behaviour online then you need the user engagement to show it. If you have an enterprise app that you believe companies will adopt to save time and money then you need some companies to echo this. It is hard for investors to ignore traction.
  • Advantage. The default of a startup is to fail and even the ones that are successful have an incredible battle in front of them. As a result, startups need an unfair and competitive advantage. This can take the form of domain expertise, IP, audience, etc.
  • Exit. The investor has to see a clear path to an exit. They need to get their money out of the company one day. An exit generally takes the form of an acquisition these days.
  • Reciprocity. I think this is the right word. I just refuse to write synergy. The idea is that the investor wants to add value to your company and learn something along the way. This will generally come from them having previous experience in your market (ie. consumer internet). As is the definition of the word, it has to be relationship where value goes in both directions. Both the entrepreneur and investor should feel like they learned something when they sit down to talk.
  • Excitement. There has to be a mutually excitement to work together. I would even extend this to hang out socially together. Life is too short to work with people you don’t enjoy being around. Furthermore, it is a known fact that humans put in more effort and are more productive when they are around people they enjoy.

These are just some of the things we run through when evaluating an investment. Would love to hear any others you think should be added to this list.

  • Great list, Kevin!

  • mjskok

    Great article Kevin. I’ll take the first 3 points alone! It’s rare for example that we really know or care too much about the exit path if we believe in the team’s vision for a large untapped market opportunity and a compelling value proposition to go after it. But you’re right that life is too short to work with people and not enjoy the journey.

    • Thanks, Michael. I admit that I still struggle with the importance of seeing an exit path as an early-stage investor. As companies are bought, not sold, a fast growing company with a strong value proposition basically addresses the issue in most cases. 

  • Kevin, great post, keep these coming.