Sometimes folks ask for my advice about starting a company, and for
getting venture financing. Here is what I tell them.
(See also my notes on hiring
If you think you have a big idea ($100M+ in annual revenue),
I encourage most entrepreneurs to get top-tier VC financing.
The best VCs have been focused on making big ideas happen,
and they will have a lot of experience, contacts, confidence
and aggression to help you.
If 3-5 VCs reject your plan (see more on their criteria below),
my advice is for you to revisit your plan vs. talking to a zillion
VCs. Yes, there are of course a few times when VCs miss funding
big deals (and for some reason, people love to gloat about those
examples), but in general, if you are working with a quality VC
firm, they will know what they are talking about.
If your idea is a good one that you are passionate about,
but not "big" ($100M), you will probably need to bootstrap
via friends and family, customers (this is the best way)
or angel investors.
I continue to be amazed by the number of entrepreneurs that
whine about VCs not funding their great idea, or giving them
bad deal terms. This is an open market; if one VC does not give
you the terms you want, try another. No quality VC will
pass up a great team/market/idea. Valuations and terms today
are similar to the average over the past 20 years, so if you
are still in denial about the end of the bubble, you might be
disappointed when you find that your toothpaste website idea
does not raise $20M, and that VCs once again expect your
team/market/idea to actually make revenue, and profit.
How VCs evaluate you
IMO, the best venture capital (VC) firms make investment decisions based
on three criteria:
- Team. Have the cofounders been successful executives
before? Smart? Aggressive? Operations skills? Vision? Strong
leadership success, at both big and small companies? Ethics? Are they
world class at hiring? Confidence (and humility)? Fun? Do they have
the hunger? This is 70% of the decision.
- Market. Is their idea in a large and/or fast growing
market? Do we know anything about this market (are we interested in
it, can we be helpful)? Do we have any conflicts? This is 20% of the
- Idea. Oh yeah, tell us again what you are planning to do?
While most entrepreneurs think their specific idea is everything, the
top VC firms invest in teams and markets, and they assume that world
class teams are smart enough on their own to figure out how to steer
the right ideas through the right markets. (Ok, this is a slight
exaggeration, but I'm trying to make a point.)
How you should evaluate VCs
- Have they been successful? Both as a venture capitalist over the
long term (e.g., someone who has only a few hits during the dot com
was probably just lucky vs. talented) and as operational executives.
- Are they ethical/confident/humble? Or
when you first meet them and start comparing
notes about people you both know, do they go out of their way to trash
some people? How would you like to work with them, even when times get
- What is the size of their current fund, will they be able to put
in enough money for the next round, and to easily find additional
investors for your later stages?
- Check their references! Ask successful entrepreneurs you know
which VCs they like, and why.
- Relevance: can they add value to your market? Do they have any