Why VCs invest? And why not? (Howard Hartenbaum, August Capital)

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).

Transient

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

  1. A really smart team, ideally has worked together before so that he knows there's no issue for the team to work together
  2. Potentially a really big market, some differentiated products and a focused plan

The NO startups

  1. Not a big enough market
  2. Founders who seem to be wont to sell the company too early
  3. Founders with consulting background or from very big companies (AT&T, Nokia, etc)
  4. Single founders — it's always better to have at least two founders who can examine ideas back and forth
  5. A team that doesn't have a clear leader
  6. A history of bad decisions to date
  7. Very capital inefficient. Complex business models, which could be useful in later stage to build entry barrier but are an absolute mess early on
  8. Depressed segments that have structural problems
  9. 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 »
  10. Poor team dynamic
  11. A startup in a space where VCs had made a lot of money in the past
  12. Wrong motivation of the founders, e.g. money
  13. Couples — boy friend with girl friend, husband and wife

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