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Venture Capital: 5 tips on how to navigate the VC gauntlet

Early-Stage venture capital firms see every imaginable type of business idea.  Since we are the first institutional fundraising “gate” that entrepreneurs have to pass through, the variety of business plans which we see fill the spectrum from awful to terrific.

Over the years I have seen lots of bad ideas:  Bad ideas for big businesses.  Bad ideas for small businesses.  And the worst – bad ideas that need to raise lots of money.

But more often than not I see good ideas.  So how does a VC choose WHICH good idea to fund?

Although every venture capital firm is different, we all use a very similar screening process.  Understanding how we think is the key to helping you choose which VC funds to pitch – to maximize your odds of receiving funding.

When you pitch us, here is the “funnel” that we think about when we are listening to your pitch:

Allow me to spend a bit of time on each of these screens – because more often than not, when we turn down a good business it is because the business just does not fit our venture capital model.

1. Is it a good idea?  This, of course, is the threshold question.  If it isn’t a good idea, no need in us looking further.  To be a good idea, we are looking for the company to be solving a real problem, in a novel way, that, when solved, has tangible value to the user – enough that they are willing to pay a fair price for the product.
2. Is it a big idea?  Here, we are assessing the potential market size, the growth of the market, and how disruptive the idea is to the market.  VC firms are generally looking for billion dollar markets and companies which have a realistic path to $100M+ in revenues in 5-7 years.
3. Can the Management Team pull it off?  This question is about you and your team.  Do you have industry expertise?  Do you have relationships with potential customers?  Is it just you or do you have a team?  Have you worked together before?
4. Is this right for us?  We say no to a lot of good companies because the business idea is just off strategy for us.  Maybe it needs to raise too much money and is just capital inefficient.  Maybe it is a biotech company (which we know nothing about).  Perhaps it is too late for us to acquire a meaningful ownership stake in the company, or too early for us to gauge possible market acceptance of the product.
5. Is it the Right Time?  Again, a fund-specific issue.  Do we have money yet to invest from our current fund?  Do we have too many companies in this space already?  Do our partners have the time to serve on the board or are we already committed?

As you think about pitching your VC, it is important to be able to answer honestly the first three questions above.  Then, as you decide to prioritize which VCs to talk with, look at their websites, and try to answer the last two questions as they might answer them about your business.

And remember.  Just because a VC says no doesn’t mean it isn’t a good idea……