What VCs Look For In An Invesment

I am in the middle of writing a post called “Who Do You Need In A Founding Team?” (full disclosure: all I’ve written so far is the title, but I have some great ideas about what I’m going to write) and along comes an article on Microsoft’s BizSpark site by Christopher Griffin, For Venture Capitalists, the Song Remains the Same. Not, as I first feared, a Led Zep tribute blog, but a post on the factors that influence an investment decision. Griffin seems to have read as far as the first page of the report, so I thought I would read a bit more.

As to the question of the most important factors in funding a venture, the number one answer (cue Richard Dawson – “Survey Says!”) is “Management Team”, followed by “Market Sector”, “Business Model”, and “Proprietary Product or Service”.

Essentially, at least one aspect of VC thinking hasn’t changed all that much in the years I’ve been in this industry, which is “we’d rather invest in an A-team with a B idea, than a B-team with an A-idea”. Note that they say “team” and not individuals. Rare, but not unheard of, is the sole entrepreneur who will snag VC funding. At the very least the sole operator should have a good network and be able to attract top people. (See Union Square Ventures – Founders and Management for a good explanation)

By the way, that was number 3 on the list of attributes that VCs look for in a CEO, preceded by Ethics/Integrity and Leadership skills. Rounding out the top 4 is “Vision”. You should take every survey with a grain of salt, I highly doubt that many reputable investors are going to be running around saying that they invest in less-than-ethical people, and if you combine the top 4 attributes that VCs say they are looking for, it spells “ENTREPRENEUR”. “Leadership” here may be extraneous since leaders should have integrity, be able to motivate people, and have vision, and we expect entrepreneurs to first and foremost have vision and be able to lead to the realization of that vision.

It also helps if you can raise money. What doesn’t seem to be that much of interest is where you went to school. Now, there is a reason why top universities are top universities, but after you leave with that piece of paper in your hand, the single most important thing you should have developed is your network. Oh, and you should never stop developing it either.

To me the “Market Sector” item indicates that investors will invest in what they understand – this is a spectacularly “Doh!” moment. Less important, it seems, is the company’s market approach: business model and (proprietary) product. Is that really the case? Good people in a market we understand but the other factors aren’t that important?

It’s just that the other factors are indications of product fit and market acceptance. Without those there won’t be much in the way of customers or traction. These are things, though, that can be fixed, but it’s better to try to at least be partially right from the outset.

So I haven’t yet looked at team, but this is a good primer as to why it’s important, and we’ll look at what makes a good team soon. In the meantime you can find out why Ben Horowitz likes founding CEOs.

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