Why You’re Not Even Getting In The Door
One of the best things about being a Series A venture fund is you don’t have to look at as many early stage deals as your upstream counterparts. Many of our deals come through G20 Members, in fact, or from partners we respect in seed stage funds from here to Tel Aviv.
That said, I’ve spent a lot of time in the last month or so reviewing angel and seed stage deals systematically, creating and refining lists in Crunchbase, reviewing them initially with team members, and finally screening them one-by-one to get down to a short list of prospects we can dig into offline. That process yielded 25 interesting companies as of today, a respectable 2.5% yield on the list we were able to identify through an attribute-based Boolean search.
For the perspective of a startup entrepreneur, though, this is a pretty grim statistic:
97.5% of deals that meet our basic fund criteria for category, geography, and stage never get to the level of a deeper review and discussion.
That’s higher than you might expect, especially when you consider it’s for startups that already secured at least one round of funding. It struck me it might be worth sharing the most common reasons we decide not to look at a company, in hopes of helping startups who want to get looked at more.
1. Doesn’t fit our fund / not interesting to me
The number one, most common reason we don’t dig in on something is that it doesn’t look like a fit for our fund strategy, which is right on our home page:
G20 Ventures provides early traction capital for East Coast enterprise tech startups, backed by the power and expertise of 20 of the Northeast’s most accomplished entrepreneurs.
We look for great teams in love with big problems. Our focus is generally on early-stage, East Coast, and enterprise software, especially virtual infrastructure and cloud-based solutions. We prefer technology risk to market risk, and won’t generally invest in 100% consumer-facing businesses…
We get that great teams are built over time, but typically look for a core team (at least 2 people) that includes a technologist with experience building solutions similar to the one being proposed, and a business person who really understands the buyer and how to reach them. We like to see a product in market, and some early customer validation.
Our sweet spot is $2–5 million in Series A. We reserve capital for every deal we do, meaning we want to be with you all the way.
Pretty specific, right? Most VCs have their version of the above, and most do their best to stick to it. It’s important that they do, since it’s usually what they’ve told their own investors they’re going to do.
Now… while there’s not much you can to do get around this in a proactive sourcing scenario, it’s important that every entrepreneur who gets to the stage of pitching a VC fund understand that fund’s investment focus going in. I know this sounds obvious, but the fact is, very few of the people who pitch us have any idea what our focus is before they show up for a chat.
Don’t get me wrong here... In the best pitch meetings, we’re pitching you while you’re pitching us, and we’re happy to do so. I’ve observed, though, a high correlation between the entrepreneurs most effective at raising money, and those who know the most about who we are and what we’re looking for the first time we sit down. It’s not a coincidence.
After fund fit, you need “partner fit” as well, meaning someone who can do a deal needs to be excited enough about what you’re doing to spend the next 7.5 years doing it with you. Remember a typical VC relationship lasts longer than a typical marriage. It’s important we both be excited about working together during the courtship, because it’s rarely going to get more starry-eyed as reality intrudes on the romance.
2. No fucking clue what it is
The second most common reason we screen a company is that we can’t figure out what they do, or why it matters. Honest-to-god.
After parsing a jargon-filled one-sentence blurb in the database and being unable to determine it’s something we’re NOT interested in, I’ll sometimes click over to the web site just to see if the message has been refined through contact with the outside world. It usually hasn’t. If after spending another 5 minutes trying to decipher either an overly abstract mission statement or an overly detailed verbal schematic, I’m out of there.
I realize I’m not a customer, but it’s unlikely something great for them is going to draw a complete blank for me. Take the time to craft a simple, plainspoken story about your value proposition that resonates with customers when you tell it in person. Use that story at every point of contact with the world. If it changes, change it everywhere, then lather / rinse / repeat right through the IPO.
3. Solution in search of a problem / Weak business value proposition
The third most often reason we don’t look at a company is it feels more like a science fair project than a revenue-generating enterprise. Too many companies that put the “How” before the “Why” in their communication, explaining over and over how revolutionary their robust, patented blockchain-open-containerized-AI-serverless-self-driving-AR platform is, but not what it does for the people who are supposed to buy it.
This is a particular affliction of student-led businesses incubated in our great universities, but it happens also to engineers who think their product is too great to need a marketing person. It’s worth saying this is probably less of an issue for angel and seed-stage VCs, but by the time you’re thinking about a series A you should have a pretty good handle on why customers are buying whatever it is you’ve made, and that’s what you should be leading with in explaining what you do.
As an investor I’m also trying to figure out how acute the problem is you’re trying to solve; whether it’s something customers are already trying to deal with, or something you need to convince them of before you can sell. The latter is always harder. We also look for evidence that the business value created by the company can be quantified in some way, because we know how valuable that can be when trying to scale the go-to-market model.
4. Unlikely a venture scale opportunity
Speaking of which… next on the list of why we pull a company from our prospect list is that the market they’re serving just doesn’t seem big enough to deliver a venture-scale return.
Ask yourself… Is the problem you’re solving big enough today to build a business generating a few hundred million in revenue, on just a small share of it? Most entrepreneurs way underestimate the importance of market selection. Nothing breaks my heart like a great team working really hard on a great solution to a problem the world doesn’t really have at scale.
Think seriously about this. What makes you believe customers are or will be spending $5 Billion a year to solve this problem? How do they think about the cost of the problem they’re trying to fix? Might the solution to that problem be a feature more than a product, a feature some other big player is just going to add once you prove the customers they already have want it?
5. Weak Founder/Market Fit
Finally, coming off that idea… How well do the people leading this venture understand this problem from the perspective of the customer?
Sometimes I think a space is interesting, but don’t get how the first team I see chasing it is going to win. Jit Saxena once told me the secret to venture was to pick the right race and bet the right jockey. It’s good advice.
Beyond problem intimacy, there’s competency fit. This is an idea I stole from David Frankel who stole it from Alex Iskold who stole it from Brad Feld who stole it from Chris Dixon who stole it from David Lee, near as I can tell. But wherever it comes from, it’s a biggie.
When I think about the 2 or 3 things this company is going to need to do brilliantly to beat other companies doing the same (“core competencies,” in MBA speak,) do I see those things in spades on the founding team? If not I’ll usually spend some time looking for someone else doing it better. More often than not — with a little effort — I’ll find someone.
It all comes back to Roadhouse. If security really is the key to making that business work, I want to be working with living legend Wade Garrett. Not the guy from Ghost...
Like this? Click 👏🏻 a few times to help spread the word, “Follow” to catch the next one, and Subscribe to our newsletter to keep in touch!