What VCs Ask Themselves About You
Having now dug into 25 or so deals with my partners, six questions come up again and again as we decide whether to back a company. The pattern seems to hold for other VCs as well, meaning more entrepreneurs should structure their pitches around providing better answers to the questions we ask ourselves when they leave the room.
Question One: “Why this?”
No matter how large a fund or how small a deal, there are only so many bullets in the gun of a venture fund. In funds like ours, a decision to invest in a company is a decision by a partner to spend a lot of time in the space you’re in, working with you through the likely ups and inevitable downs on the way to a (hopefully) positive outcome.
To get that kind of commitment, you need to get us excited about what you’re doing.
The first question we’re going to ask ourselves when reflecting on your deal is Of all the things I could spend my time on… why this? What’s exciting about the problem they’re focused on, or their solution to it? Is it a huge, global opportunity, something able to deliver a venture-scale return? Have they uncovered a revolutionary approach that will scale with a long-term first mover advantage?
I use the word “exciting” quite deliberately here. VCs are people. If you don’t move us toward an emotional reaction with a simple and compelling answer to this first question, you’re probably not going to get a meeting with us in the first place, let alone the capital your business needs.
Question Two: “Why them?”
If you’ve answered Question One in a way that’s convinced us you’ve uncovered a massive opportunity, experience teaches it’s unlikely you’re the only one who has. That means we’re likely to face a choice at some point down the road.
Your second job is to convince us your team is the one we should bet on in the race to meet that opportunity.
Proven teams have the best answer to this question, of course, particularly those with an intimate understanding of the customer problem they’re focused on. Deep functional expertise in the capabilities required to solve that problem are the second most valuable kind of experience, though keep in mind the emphasis here is on “proven.” Just because your product person was at Google for a cup of coffee doesn’t make her a “rock star.” We’re looking for specific experiences in your founding team that evidence customer intimacy, functional expertise, and startup management experience deep enough to take some execution risk off the table.
Question Three: “How?”
If you got the pitch meeting, assume you’ve addressed one or both of these first two questions. Start that meeting by crushing both in as little time as possible, and ONLY THEN focus your attention on Question Three, which is How do you plan to do whatever it is you claim you are about to do?
Calibrating the depth of “How” in a first meeting is tricky, but entrepreneurs generally spend way too much time on it.
Remember… this is going to be a process, and no one expects to get to the bottom of “How” in meeting one. Just give us enough information to convince us you know how you’re going to pull this off, answer our questions directly and in enough detail to inspire confidence you have a plan, that you understand the levers of success, and are prepared to manage them closely.
Question Four: “Why now?”
Once we have working hypotheses on Why this?, Why them?, and How?, someone usually asks what changed in the world to create the window of this opportunity, and what is likely to close it.
“Why now” is the least intuitive of the 6 questions, but it tends to force a closer look at the context of your opportunity, and usually surfaces assumptions we can diligence as part of the process of building conviction.
Artificial Intelligence (AI) or Machine Learning (ML) crossing some capability threshold is the today the most common shift in context entrepreneurs point to as creating a new opportunity. Other biggies include blockchain, drones, and Virtual Reality (VR) / Augmented Reality (AR,) along with the Gig Economy, the Graying of America, and even more recently multi-device continuity. While there are exceptions, recent opportunity window-closers include App Stores, Mobile First, and Social… not because those capabilities aren’t enablers of new products and solutions every day, but because the biggest and most disruptive opportunities they created are probably gone by now.
Think the prevailing wisdom is wrong, that you can break through the clutter on the app store, for example? It’s possible, of course, but you need to explain why and how you intend to make it happen.
Question Five: “Against whom?”
It’s just dumb not to have a slide that shows you’ve thought about who you’re going to be competing with once you’re up and running. Be honest with yourself and with us about the dimensions of that competition, including your relative advantages and disadvantages. Tell us how you’ll beat them to win individual customers, and how you’ll do so overall.
And if you think saying you have “no competition” because you’re creating a “new category” will get us excited… you’re wrong.
Question Six: “How much?”
Finally, we’re going to need to understand what being a part of your business is going to cost. It helps to understand how much money you hope to raise and how much you have already, and to have some directional indication of what you think the business is worth. Entrepreneurs rarely put specifics on the table here and that’s ok, but before moving forward we’re going to want some indication of the size and shape of the transaction, and whether we’re likely to lead the round or follow someone else’s term sheet.
Remember VC is not a game of bargain hunting.
We never spend time talking about how low a deal would need to be priced for us to be interested. The question we usually ask is the maximum effective price we’d be willing to pay (once all the transaction terms have been factored in) that still gives us a reasonable shot at the returns we need.
The questions we’re going to ask ourselves after you leave are:
- Why This?
- Why Them?
- Why Now?
- Against Whom?
- How Much?
Develop a 20-minute pitch that covers the basics, and be ready to spend the rest of our time together exploring the details we need to take the next step. Help us answer these questions openly and honestly, and you’ll give yourself an advantage not just getting the cash, but the committed partner you need to succeed.
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