Things like "team" and "gut check" are especially useful answers for that, because a) it lets VCs sound like intuitive geniuses who can't easily be replaced, and b) the I-know-it-when-I-see-it nature of those lets VCs smuggle in all sorts of irrational biases. As one well-known investor said, "There was a guy once who we funded who was terrible. I said: 'How could he be bad? He looks like Zuckerberg!'" Points for honesty, but you can bet that wasn't the official reason they invested.
1) diversify their investments amongst many areas in tech (or maybe some non tech things, not stereotyping all VCS but for this example I'll say diversity of problems being solved using technology/software etc) and thus see commonalities of problems amongst teams in their experience despite whatever the specific niche industry is. I think it is pretty important to agree the cofounders are important. Specifically I've heard from CEOs of startups I use to work for they are really good at hunting out "weaknesses" in the bonds between cofounders.
Basically, they don't want a good idea to fall apart because two cofoudners fundamentally don't see eye to eye, which will make it hard for any decisions they make (whether good or bad) to come to fruition and indicates future struggles with the company, in addition to weak leadership/unified approach when hiring new people, who might be disoriented at understanding the direction the company is going in.
2) Focus on particular niches (a startup who focus specifically on funding AI startups, for example) often they will even fund competitors knowing that if one of them dies, they are almost gauranteed to reep benefits from the remaining on in the niche field. This also means they keep a close track on the variations between two or more companies approach in a specific industry and why one failed and the other didn't.
Someone from Marc Andreessen's team recently published a blog post going into great depth about 5 factors amongst ten or so AI teams that indicated their levels of success in the field, and most of the tilting factors are not what I would say is common knowledge amongst AI startups.
They may have their biases, but they also have unique experience in understanding or seeing repeated dynamics in what could make a relationship (between cofounders) fail (like seeing that one bad relationship where the couple can't see it but it is so obvious to you because youve either now been through it or seen it happen before, imagine this for VCs looking at cofounders over and over again for ten years...) and otherwise have lost lots of money over failed business ideas, so I would say they are incentivized to be as objective as possible with themselves, even if just selfishly for the benefit of their own bank account.
The point is that people micro-tweak their behavior based on simple reward mechanism. Most can’t explain how they got there.
Top VCs are no different. They remind me chicken sexers (is that even a word?), who have differentiate gender by looking at their bottoms and quickly able to tell without ever being able to explain how they know [1].
With this long dribble I want to encourage founders to develop their own intuition. Create a pitch that makes sense to you and then tweak based on feedback.
[0] https://www.tacticaltennis.com/tennis-mythbusters-wrist-snap...
[1] https://www.businessinsider.com/the-incredible-intuition-of-...
Only problem is that VCs normally don't give any!
We analyzed the results of our first 500 reviews and calculated the correlations between high marks in categories like team, problem area and business economics with the number of requested intros from our reviewing VCs.
In other words the individual factors were graded, and the VC chose whether or not to meet. They are correlating the ranking of the components with the likelihood of asking for a meeting. They are not relying on the VC explanation of why they asked to meet.
I am curious who graded the proposals and how consistent that was. It would also be nice to see what good vs bad looks like in each category.
† https://www.lesswrong.com/posts/h24JGbmweNpWZfBkM/markets-ar...
If you’ve ever heard publishers talk about the https://en.wikipedia.org/wiki/Slush_pile submissions they receive, it’s much the same: they have clear and stable and “knowable” expectations, but authors break them, because most authors are new authors submitting their very first manuscript, having never gone through this process before, never received feedback before, and so never had any data with which to polish their approach before.
(The other main reason that VCs and publishers both receive so many pitches they don’t feel fit them, is that the markets they operate in are heavily slanted in their favour, and so they don’t put much work into making their requirements known. They often don’t put their expectations on their websites or anything. This can be circumvented on the supply-side, though, by just asking around to find out from other submitters what a given buyer is looking for. Some enterprising souls have even done the “lazy” supply-side’s work for it, and compiled indices of the requirements for the buyers in the market.)
We're actively recruiting now and it's amazing the amount of hostility we receive sometime when someone is rejected.
There's a HIGH false negative rate on our end. Meaning, we're going to screw up and walk away from candidates that are amazing - but we're unable to realize it in time.
Yet, people will still react negatively.
If I was a VC I would probably quickly learn to just keep my mouth shut.
They may have your company in mind to work with another company they know/own down the line, or the other way around and with that, see which one works well and breakup the other. That they won't outline at the start and yet would be a reason of interest in buying.
Too much, or not enough.
A trusted introduction can even overcome a bad deck in some cases. But there should be no reason to have a bad deck now-a-days as there is ample reference and knowledge share.
First-time founders: Please don't pay for access. Services like this, in my opinion, are dubious at best. Work on building a network, blogging, open source, meeting other founders, going to VC events, tapping your alumni network, etc.
The Problem & Market Segment - Moderate to Strong Predictor
"This would have been a stronger predictor had it not been for a few outliers at the top. Aside from a few companies who got a high number of intros despite scoring relatively low here, this was overall a very good predictor of who get intros. Picking the right problem to work on seemed more important than having the right solution by more than 2x.
So what was the most important factor?
Which area, if a VC only knew one thing about your company, was the most predictive of enticing a VC to want to meet?
Some founders might be disappointed, because its that age old question that they love to hate…
“How does it make money??”
Yes, the underlying economics of the business was the strongest predictor of whether a VC wanted an intro over any other aspect of the company. Founders who could clearly articulate an economic opportunity fared really well with investor interest."
Hmm, reminds me of some song lyrics...
"Come on, come on, listen to the money talk..."
-AC/DC "Money Talks"
Observation: Just as Scientists talk science, and Lawyers talk law, Venture Capitalists speak "Venture Capitalese", aka "Money", aka, "How much money could I the VC make with this?
That, and give me compelling proof of what you're saying in under a minute..."
Ideas, on the other hand, even great ones (to a VC point of view!) are the proverbial "dime a dozen" (or less even! An idea and fifty cents will get you a cup of coffee... Or, an idea and five dollars will get you a cup of coffee if you go to Starbucks...<g>)
As Charlie is an NYC VC, I assume most investors on this are from NYC and there may be an Easy Coast bias in the data here. It’s a stereotype of East Coast VCs to overly focus on monetization compared to West Coast.
better to focus on figuring out what perspective you’re currently missing to how you can better help your customers THRIVE.
Ethics in AI would ask us to consider the unconscious bias introduced into the algorithm's outcomes. The same interest applies to human-generated outcomes. Either way, the input is a group of humans making subjective decisions, and since unconscious bias survives summarization, it should be accounted for.
That said, having a realistic plan on how your idea turns into a sustainable business is certainly key too. That’s even more important with the economy we’re heading into where startups that are not financially stable are not long for this earth.
VCs are no different. The survey would need to be far more rigorously designed to correct for those tendencies and I dont even know if it can be done.
Where software development is just an example of one of the skills you would need
Vs.
"We prototyped this ourselves based on our experience coding with best in class teams for scalability, performance and optimizing cost savings for scaling (lets say web platform?) web platform, and we have a working MVP with some customers onboarded and seem to be growing faster than we can handle due to demand, and even though we are all pretty good at running this platform ourselves, we know some key people we want to hire to take over the scaling our existing backend devops teams so we can focus on the UX/UI and feature development to respond to specific asks from our current customers because we know these will keep them on board with us vs our current competitors."
In general, they are looking for people who are realistically engaged with the resources it needs to implement the solution to the problem where many people have the attitude of "I have the idea, I will hire minions to do it for me, I just need $5million from you to do that so I can hand out tshirts and take credit for their work at conferences while my minions do the work, duh".
You may think this does not happen. It happens quite alot....
The VC Web sites were deceptive: They claimed interest in new, advanced, powerful, for big markets, secret sauce, barriers to entry, high margins, etc.
Nope. Much as in the OP, the main thing they want is just current revenue, or at least proxies such as monthly unique users, significant and growing very rapidly.
So, I switched projects to one I can do as a sole, solo founder funded with just my checkbook.
Let's get a view of something VCs do not like but their Web sites implied they would like:
To the users, my project is just a Web site. The project is a new search engine for Internet content. The main business idea, drawing in part from some old work at Battelle, is that quite generally keywords are good for only about 1/3rd of content search. My project is for the other 2/3rds. Keys in the work are some new data and new ways to process that data. The new ways are from narrow, advanced pure math and some original applied math I derived (users will not be aware of anything mathematical) -- this use of math is the intellectual property, trade secret, secret sauce, technological advantage and barrier to entry, etc.
Status: Code for the project as envisioned, not just a minimum viable product, is ready for significant production, say, if enough users like the site, a one person company with revenue of $10 million a year, nearly all pre-tax earnings.
Team? Just me, and that's enough for now. Qualifications? Plenty in computing from IBM's Watson lab and much more. For the math, I hold a Ph.D. in applied math from a world class research university -- one advisor had other students build on my research and was later President at CMU.
Status: Code (.NET and SQL Server) for the project as envisioned, not just a minimum viable product, is ready for significant production, say, a one person company with revenue of $10 million a year, nearly all pre-tax earnings.
Lesson: My project is of zero interest to any well known VC. They don't care about any such project. Period.
Before going live, I need to add data -- doing that.
Got delayed by some outside interruptions, e.g., moved.
Early on, but not really now, the work could have been helped by some VC funding. Now, if the project gets even $1 million a year in revenue, then I will not want or need VCs.
So, net, with VCs, when I would have wanted them, they didn't want me; if I get to where they want me, then I won't want them.
There is some advice about VCs: Wait, that is, be successful enough, for them to call you. If that time comes, I will just check my old files and tell them the dates when I did contact them and they were not interested.
I want to make two broad points:
First, the economic shutdown for the COVID-19 pandemic has revealed that "50% of the US economy" (whatever the details on that are) is "small business". Next, as I have looked around at the families doing well, e.g., money enough for a 50' yacht, to pay full costs at Harvard, they are nearly all from running a family owned business and never got even 10 cents from a VC. Okay, start and run such a business where computing, the Internet, maybe some secret sauce (now these three can be just dirt cheap, less than some people spend in restaurants for a year) help but without VC funding.
Point: To do well in the US, don't really need VCs; e.g., nearly all the US families doing well are running family owned businesses, all across the US and not just along the east and west coasts, without any VC funding.
Second, there should be some big opportunities in applying what is in the research libraries in math, science, and engineering and/or doing and then applying more such research.
This fact has been well known for ~70 years by the US Department of Defense, CIA, NSA, Department of Energy, NSF, NIH, CDC, NASA, ONR, etc., well known and heavily exploited with huge benefits for US national security, health, and economic prosperity. E.g., we got GPS from a project of the USAF. For some decades, there were similar contributions from Bell Labs -- information theory (e.g., upper bounds on data rates), error correcting codes, the transistor, tiny solid state lasers lighting long haul optical fibers, etc.
Typically these projects are submitted and approved just on paper. The batting average is high: E.g., Keyhole (like Hubble but before Hubble and aimed at the ground instead of the stars), LIGO, the A-bomb, the H-bomb, the SR-71, navigation satellites (first from the US Navy and later from the USAF), nuclear fission power, the SSBNs, TCP/IP, NSF Net (now the Internet), DNA sequencing (the key to detection of SARS-COV-2 and now maybe to a fast vaccine), ..., all worked just as planned, essentially the first time, on or close enough to on time and on budget. Batting average! ROI!
Gee, if the USAF charged a penny for each use of GPS they would have how much money?
If Bell Labs got a penny for each transistor they would have how much money?
Point: The VCs just will not evaluate and fund projects presented just on paper and, thus, are missing out on such developments.
Final Point: VCs make some money and do at times help some projects, but their methods of working are quite narrow, and in the US the paths for making money are in principle and at times in practice much wider. There is a lot of opportunity doing projects the VCs won't fund.
This is 100% true and 10,000% annoying. Effectively it blocks anyone who has an idea for an idea for a business that needs seed capital from competing unless they're already wealthy (directly or able to raise funds from within their own network of friends and family). 15 years ago seed capital was exactly that - money that was available to fund a startup based on little more than an idea and a persuasive team. It was massively high risk but that was kind of the point. The taste for risk that VCs once had is gone. Today what people call seed rounds are really Series A. You need to have already done the high risk proof of concept work and actually have something on the market before VCs will take your call.
That's entirely up to VCs of course. If they want to do that they can. And no doubt they'll still make a lot of money. But society as a whole is faced with dull ideas thought up by middle class kids who want "innovative" ways to pay someone to do their chores because of it, and that pisses me off a lot.
End Rant.
15 years ago, there weren't any "programming bootcamps" or "entrepreneurship workshops" or "become a UX ninja in 7 days crash course" to the extent that there is today, Harvard MBAs didn't give much of a crap about working in tech, computer science students were there for the nerdy stuff, not because they wanted to be the next Zuckerberg.
There just isn't much risk left in tech. The path is that now you start a weird crypto startup (which aren't even that weird anymore because there's dozens of them) while you're comfy at Stanford, you hope to get a fat check before you graduate, and if not you go work to Google. Or you quit Google, start your company, get some investment because you were at Google after all, and hopefully a few years later your startup gets bought by Google.
Tech startups just aren't weird and new and unknown anymore, as far as the money people are concerned. Does it fit their idea of what a company on its way to a billion dollar valuation looks like? If yes write a check, if not tell them thank you and let the next team in.
Has available seed capital declined overall or is it just coming from different places now?
If true:
1) VCs will stop making money, or there is an endless money stream available to boring startups as long as the barrier to entry is kept up.
2) We will see stagnation in many industries but particularly tech, which will only make it easier for actual innovation to shine.
The endless money stream bit could be true, but if we accept that it negates 2), we should just give up anyway (or shift all focus to politics until it's solved).
There's your startup. Get some money and invest it in all those teams that need initial funding.
You may also want to establish an online forum for young entrepreneurs and engineers to hang out and discuss news and ideas so that they know about you and approach you once they need the funding.
Then I can spin a lot of the other work off to pay-as-you-go SaaS tools. Payments, sales support, CRM, support, marketing, analytics, feature flags, landing pages, A/B testing: all of these are things I don't have to build any more. And now thanks to the rise of things like Slack, Zoom, and Trello, remote and/or part-time work is much more tenable, meaning we don't need an office and full-time commitment to get going.
So yes, VCs are going to take minimum risk for maximum return. But they always have. What's different now is that you don't need to convince some rando that you need $250k in seed money just to find out if your idea might work. If it does, you'll at least be in a better negotiating position. And maybe you won't need to seek investment at all.
But yes, most VCs will never bother follow-up.
Before rails there was LAMP. That's what Facebook used. Java servlets existed as well. And rented clouds existed before AWS as well. Despite the hype for them on pages like this, neither AWS nor Rails were really big disrupting inventions. The market for both existed before them, and will exist after they've fallen out of favour.
Where innovation happened is in the scaling domain. Terraform, kubernetes, etc, as well as in the SaaS tools you mentioned. But most of those things aren't needed for earliest stage startups. You don't need to be super scalable from day one. You can just run everything from one very powerful box for a while.
Of course this all depends on what your application is. If your product is a cloud based tool to post process movies, it will be a different setting from a CRUD app to plan events.
Having lived through it, it's just loads easier to get something up and going these days. I ended up back in some Java code again recently, and servlets are a) a pain, and b) a general-purpose abstraction. They're adequate for a lot of things, but not particularly great at anything. Whereas these days people have had 15 years to come up with special-purpose code to accelerate all sorts of common activities. My point wasn't that AWS and Rails were the only good things that happened in 15 years. It's that those, which now seem old and boring, were near beginning of a whole wave of innovation aimed at making it easy to have a consumer-grade user experience up and running.
It was that investors aren't going to pay for anything they don't have to. If there's a sufficient stream of web/mobile based startups coming to them who already have some proof, they're going to be much less likely to fund people who don't have that proof yet.
That could change, of course. The pandemic is making it clear how threadbare that ideology is, so perhaps we'll return to valuing things beyond a high rate of shareholder return.
At the end of the day, they have money. Assume they are selfish and want to not lose money, so they probably have some rationale on which they give out money in hopes for a return on investment. That being said, I've seen way too many tech bros with bad blockchain ideas get way too much money which usually goes straight to their heads before they lose it all, and I assume the V.C.s have a really good strike price and know exactly when to liquidate.
For others, it was my general understanding VCs lose money on most investments, hoping that a few end up going really big and canceling out the losses on the rest, but I don't really know anything about VC stuff. I'm not sadomasochistic enough to try to start a company, I just try to work on my skills and people are willing to pay me to invest in myself because I tend to discover interesting things while I tinker about and also keep things from failing often in a raging dumpster fire but I don't know if thats a good way to market my skills.
It's a relatively small percentage of jobs that require people to be good at manipulating the opinions of others. As you say, marketing is an exception to that, but their business is manipulation, so that's not surprising.
I have friends in healthcare as well, and I don't hear things are much better too, in regards to the business ethics of the healthcare system.
My overarching point is that anything that involves finance is likely to be corrupt, and VCs are just one segment of them, but there are a lot of more corrupt financial entities with way less transparency and as a result, way less criticism.
It's not really a fair comparison to match factory work, cutting hair, and being a cashier to being a hero of honesty in relation to finance related jobs. Take cashiers for example, their job is to accurately ring up listed prices decided by a much more complex decision making system, leaving very little decisions for them to mess up at that point, and anything they do unhonestly, is likely to be relatively black and white in comparison to the unethical lobbying behaviors multi billion dollar corporations that bankrupt farmers that farm the seeds they make to monopolize food markets, that the cashiers are ringing up.
Yes, VCs are able to lose alot of money and not really be accountable for it, but so are many other industries related to finance...
Not sure why you are so convinced VCs are the one evil entity in the thousands of permutations of finance, but if I had to call out evil entities in finance it would be the credit market, corrupt government, wallstreet investors, but atleast somewhere at some point VCs gave value to some entity you can track other than transiently through a stock from an algorithm to maximise their profits, but I get it, you hate VCs.