I've got so many questions from entrepreneur-wannabes in our HEC MBA program about why VCs invest in certain companies and why not in others. I've always tried to give answers that are emperical (from my hands-on experiences in Truffle Capital) or theoretical (from financial theory viewing Venture Capital as an asset class).
As always, there's somebody out there that is wiser and has a better way to address the question, as I came across the wisdom from Mr. Howard Hartenbaum of August Capital today.
The source is the famed Entrepreneurship workshop with Stanford University. The course is entitled « Entrepreneurship through the Lens of Venture Capital » with course number MS&E 71SI. You could find the videos on iTunes U at this address. While each video is worth your 1 hr to go through as an entrepreneur, here I am referring specifically to the 2nd session « Funding Your Startup ». At around the 36th minute, Mr. Hartenbaum gave a very useful list of whom they invest in and don't. As he commented, the list for YES is much shorter than that for NO. I hereby provide a summary and strongly recommend you to watch the entire video, or better, the entire workshop.
The YES startups
- A really smart team, ideally has worked together before so that he knows there's no issue for the team to work together
- Potentially a really big market, some differentiated products and a focused plan
The NO startups
- Not a big enough market
- Founders who seem to be wont to sell the company too early
- Founders with consulting background or from very big companies (AT&T, Nokia, etc)
- Single founders — it's always better to have at least two founders who can examine ideas back and forth
- A team that doesn't have a clear leader
- A history of bad decisions to date
- Very capital inefficient. Complex business models, which could be useful in later stage to build entry barrier but are an absolute mess early on
- Depressed segments that have structural problems
- Startups who come in with lots of buzzwords, e.g. « We are leaders of CLOUD sourcing platforms that capitalize on BIG DATA with the next generation SOCIAL NETWORK »
- Poor team dynamic
- A startup in a space where VCs had made a lot of money in the past
- Wrong motivation of the founders, e.g. money
- Couples — boy friend with girl friend, husband and wife