1/ A product that has a large TAM (Addressable Total Market)
Paul Graham (Y-Combinator) describes the “TAM” as follows: “Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who’d pay an average of $y per year for what you’re making, then the total addressable market, or TAM, of your company is $xy. Investors don’t expect you to collect all that money, but it’s an upper bound on how big you can get.”
The TAM must be several tens of billions € at the European level, or close to 100B€ globally, ideally more.
There are several ways and approaches to calculate it. I recommend reading this article by Bill Gurley, taking Uber for example, to apprehend the concept and learn how to calculate your TAM. Read also the article by David Skok who, in a way, sums up the article by Bill Gurley.
2/ A major problem to be solved
The title speaks for itself and it is better to give concrete examples. The most well-known exemple is the one about the taxi market vs Uber, which had never been “disrupted” by new entrants and have never witnessed any innovation waves. We can also mention BlaBlacar vs SNCF, or even Trainline vs SNCF.
As Jean de La Rochebrochard tell us, we must tackle “monopolies / frozen oligopolies or what I call broken markets…”
Or Martin Mignot: “tech companies which typically disrupt an existing market by undercutting the incumbents on the one hand (and hence shrinking the market), while creating a new use case attracting a larger number of new users on the other hand.”
To go further on this question and find some inspiration, I recommend these contents:
3/ A premium team
- “Animals” on board : Christoph Janz from Point Nine is explaining it well: “Coding animals. Usability animals. Design animals. Sales animals. Marketing animals. In short: Founders who work like beasts to make their startups successful.” and “…is perfectionism at what they’re doing, coupled with a relentless drive.” These “animals” therefore have a great ability to execute and an absolute strong client focus. They live only to have excellent customer satisfaction.
- A sticky cohesion between the founders : A strong complementarity in the expertise and personality. Founders who support each other, don’t step on each other feet and have 100% trust in each other. Ideally, they know each other for a long time and have a compelling story to share about how they meet in the first place.
- A nice track record and ideally in the field of entrepreneurship: some VCs like “founder-bets”, doing deals on a simple pitch-deck (without product) with successful entrepreneurs, well known by VCs (like Criteo, Lunchr , Less, Qonto, Shine, Alan …)
- Founders obsessed to solve their “major problem”: To see concrete cases about this point, I recommend the conference on this subject made by Jean de La Rochebrochard: HERE
- Be super resilient!
- A flawless understanding of the market (know more about the market than the VC … not easy, they are very sharp): Know your competition, new entrants and incumbents. Know the structure and dynamics of the market. Know how how the market will evolve in the future. Know well your targeted market, show the different segments. You must have a sales and marketing strategy.
- Data-driven, a strong discipline on the collection and analysis of data: Have in place a metrics dashboard (marketplace or SaaS) and the right financial tool, as well as a fine understanding of the right KPIs (a form of new accounting is emerging)
- A vision that is compelling, communicative and effectively shared by the founders
- A humble and determined attitude
4 / Ambition
Become the world leader in your industry, no more, no less. Have an internationalization strategy from the first day.
What many entrepreneurs do :
What we are looking for with VCs:
5/ Do a lot with little
This is one of the main point of the Index Ventures investment thesis :
“Execute on what is possible with no funding first. How much you are able to achieve without funding is a strong indicator of what you will be able to achieve once funded. We are much more compelled to invest where teams have done extensive market research, built prototypes or alpha products and road-tested marketing campaigns before raising funds”
6/ Have a piece of traction and / or market / fit
As they say, traction is hard to evaluate, but you recognize it when you face it.
Jason Lemkin has established some key figures that show you have traction:
- ARR of $ 1m or more
- ARR / MRR Growing> = 100% a year, annualized
- With> 50% of new revenue from zero-cost marketing, i.e. viral, ether, word-of-mouth, whatever … because these compound.
Another series of items can help you qualify it:
- For a SaaS a minimum of 50k € MRR
- For a marketplace a GMV / month> 50k € and a starting strong liquidity of the offer
- For a consumer app a minimum of 500k DL in 6 months, with a strong virality.
This article by Sarah Tavel presents the two points that VCs are looking for to evaluate if a product has some traction. It is necessary to have datas that prove that these two elements exist in your product and will improve over time:“10x better product than the incumbent (taxis), and deliver at a lower price”
7/ Have or starting to have a strong “defensibility”
Defensibility is a key point. In summary it is the fact that a product get better the more users are using it. It manifests itself in several ways, like the network-effect (ex: marketplace), the construction of a recognized “brand”, the massive collection of unique data (= IA “moat”), economy of scale (ex: Amazon ), exclusive distribution channels, lock-in effect and “high switching costs”, also patents / intellectual properties.
As Martin Mignot summarizes it, you know you have some “defensibility” when you observe its consequences : “…the best companies literally suck the air out of their market as they end up capturing an ever larger part of the users’ actions, which they then leverage to make their product better/smarter.”
8/ A bold attitude and huge execution capacity
One cannot build Google (the platform) in a few years, it has to start by doing the “thing” that will launch the venture on the right path, only focusing on it and dedicating all its resources to achieve it well, and not scatter in the more general execution of his vision. Robin Dechant speaks about it in an article: “Platform-second: instead of trying to build a platform first, try to start with a narrow use case and develop the product with the goal of having a platform in the long run”. The quote from Savina van der Straten also helps us understand these benefits : “starting with a narrow domain can help to reduce complexity and achieve good results”. This approach is a recipe for success according to Rodrigo Martinez : “In almost all scenarios, the winner is the one that iterates the fastest. First to find product market fit and then to keep evolving fast to win over competition.”
9/ Have accomplished “Feats of arms”
The most classic example in the history of the industry, and the cheekiest one, was that of Google and their first servers, built according to the legend, with old computer disks and LEGOs (post BackRub and the squatter of Stanford’s servers, already a beautiful feats of arms). At the time they was no AWS or CleverCloud, the rest of the tech-startup at that time were spending their money in marketing and not in infrastructure. This decision was counter-intuitive, however the bet was the good one : a huge indexing power and the power to manage 10,000 daily searches.
You will find examples of “feats of arms” in this talk : HERE
10/ Aim for an ambitious “exit”
- An exit necessarily higher than 50M €
- $ 100M in ARR within 7–8 years
- 500m € + valuation in 7–8 years
11 / Fluent in english (no comment)
12 / Your “gross margin” must be positive
13 / balanced cap-table
Here is an article to read