Fifteen years ago, between my first and second companies, I spent a few months at Sequoia Capital (investors in both) as an Entrepreneur in Residence. In my late 20’s, I was certainly not ready to be a real venture capitalist, but was not too immature to learn some lessons from the seven-man team (back then) at one of the Valley’s best VC firms.
“Market, product, team. In that order,” was the mantra. And I have now given many presentations that elaborate on how those basic criteria of a company’s DNA determine whether it deserves my investment dollars. I am still looking at every deal through the prism of that terminology’s facets and will probably continue to do so for the rest of my career. Whenever I listen to a company present or read a proposal, I look to see if the company covers the basic points (in order of importance):
Market: *Why now? *What pain is the company addressing? Who are the people that have this pain? How many are there? Do they have money to spend for the solution? How much money do they have? What are they spending this money on right now?
Product: *Why this? *What have you built and are planning to build? What does it do? How does it address the market you described? What is unique about it? Why will it be better than the others out there? How does the product extract the cash the market is willing to spend on the solution to its problem?
Team: *Why you? *How smart are the co-founders (I don’t like one-man companies)? What is their education (schools matter) and professional background? Have they done this sort of thing before? Are they honest about skills that are missing from the team or will it be a struggle to get them to take on additional leadership and accept help?
So, I thought I would briefly describe the various scenarios that periodically show in the inbox. I am looking at whether the Market, Product, and Team pass scrutiny (check marks) and indicating how often these combinations occur as well as the likelihood of them getting funded. Those are denoted in the iconographic.
This almost never happens (at least it never happened to me), that’s why I put the probability at 2%. A seasoned, entrepreneurial team with real domain expertise walks in the door with a product that is already built that addresses a big and growing market need. They have shown some customer traction, have all the key slots on the team (CEO, Sales, Engineering, Product Management) filled. The product is taking off and is about to get even bigger due to the market’s future growth. And they are looking for Series A funding. If I get one of these, I will be rallying my partners for a term sheet, build investor consensus, and I will go out of my way to make sure we don’t miss this one. I can not give any examples of the “dream deal” showing up on my doorstep, but, I am sure there are other VCs who probably can.
Big market, sweet product, needs “adult supervision”
This is a pretty good scenario seen about 20% of the time. This has a good chance of getting funded. The product (already built) addresses a big market need. However, the company will need a few more people to make this product into a business. Usually, the missing people are either senior managers who can hire and scale or salespeople who can take the product to the customer (if it’s B2B). When I think of a classic example of this kind of company, I think of Google in 1997. There was no need to prove that paid search advertising was a big market (Yahoo showed that). Google’s team built an amazing new engine for doing search that not only produced more relevant results, but also scaled like no other. They just needed to package it, acquire or copy some marketing technologies, get some sales-minded people on board, and sell the hell out of it. That’s how a $20M investment turned into one of the most successful internet businesses the world had ever known. Unfortunately, these too are relatively rare. And, unfortunately, getting the founding team to realize that they need help is not easy. They may not share your idea for what the market really should be, disagree of the business direction you would like, or simply are not willing to give up enough control to (dare I say) replace the CEO. And, if the founders are against even acknowledging that they need real help (vs. just a few hires), no deal can take place — it’s their company and they have every right to do with it as they want. And it’s your money and you don’t have to invest it. That’s why the likelihood of getting even this funded is still under 50%.
The business guys
This is a fairly common scenario (again, 20%), especially in New York where I now work. A few experienced, industry-savvy professionals have sensed a market need. They know what they are doing and have a Rolodex of potential customers. They know what the problem is and who is willing to pay for the solution. The issue here is that they have not built the product. These are the guys who feel that they simply need a “technical co-founder” or that they can outsource the software development to a third party. Technical co-founders are not just found waiting for an opportunity and outsourced engineering is not something a technology VC should ever back. As an investor, you are betting on a chance that the team will be able to find someone technical enough to build the product, human enough to attract other technical people, and business- oriented enough to grasp the industry veterans’ understanding of the market and product fit. No easy task. You better have a technically knowledgeable VC on board who can help sell the vision to a bunch of engineers. Will probably get funded, and, as a technical VC, I like these opportunities. But the team better be willing to listen and treat technology with the respect it deserves.
Here, we see a balanced team that has built an interesting product. Unfortunately, the team has little idea where the market for this product lies. The team is willing to listen, understands that they may need to pivot to target the right market and are willing to accept business guidance, contrary to their engineering ethic — but this is rarely the case. Others’ not seeing technology applications that seem obvious to the founders often frustrates founders enamored by their vision, so obvious to them. Here, a VC really needs to roll up his sleeves and build a business. And that is hard to do as an outsider. Or, you have to come armed with money and patience while the team figures out how their product becomes something that sells.
Charismatic superstars with track records and resumes that read well. Unfortunately, they have not bothered to do their homework, have not figured out what market to enter, and have not given the product much thought. Might get funded, but not in my book.
Often, these are companies that state the obvious problems and don’t propose a differentiated solution. Yes, it’s a good idea to make things faster and cheaper and there are lots of people willing to pay for what you are pitching. But, you have nothing to sell and I see no reason to believe that you will figure it out. Pass, almost certainly.
Whether university research, a pet project, or a cool gadget, these companies have built something that is really “neat” but not revolutionary enough to make money because there is no clear need for the product. Their “thing” is nice to have but no customers really needs it And because, as a team, they spent time building it, makes me questions the team as well, no matter what their credentials. This is just gambling on the next “i Fart” app — Pass.
Every now and then you see delirium that somehow passed all the filters and ended up on your desk or, worse, in a presentation. I get it over with quickly.
So, that’s my classification system. I am not saying it’s completely right or that everyone has to agree. There are lots of other VCs and there are lots of other companies.