Sometimes folks ask for my advice about starting a company, and for getting venture financing. Here is what I tell them. (See also my notes on hiring and NDAs.)
If you think you have a big idea ($100M+ in annual revenue), I encourage most entrepreneurs to get top-tier VC financing. The best VCs have been focused on making big ideas happen, and they will have a lot of experience, contacts, confidence and aggression to help you.
If 3-5 VCs reject your plan (see more on their criteria below), my advice is for you to revisit your plan vs. talking to a zillion VCs. Yes, there are of course a few times when VCs miss funding big deals (and for some reason, people love to gloat about those examples), but in general, if you are working with a quality VC firm, they will know what they are talking about.
If your idea is a good one that you are passionate about, but not "big" ($100M), you will probably need to bootstrap via friends and family, customers (this is the best way) or angel investors.
I continue to be amazed by the number of entrepreneurs that whine about VCs not funding their great idea, or giving them bad deal terms. This is an open market; if one VC does not give you the terms you want, try another. No quality VC will pass up a great team/market/idea. Valuations and terms today are similar to the average over the past 20 years, so if you are still in denial about the end of the bubble, you might be disappointed when you find that your toothpaste website idea does not raise $20M, and that VCs once again expect your team/market/idea to actually make revenue, and profit.
How VCs evaluate you
IMO, the best venture capital (VC) firms make investment decisions based on three criteria:
- Team. Have the cofounders been successful executives before? Smart? Aggressive? Operations skills? Vision? Strong leadership success, at both big and small companies? Ethics? Are they world class at hiring? Confidence (and humility)? Fun? Do they have the hunger? This is 70% of the decision.
- Market. Is their idea in a large and/or fast growing market? Do we know anything about this market (are we interested in it, can we be helpful)? Do we have any conflicts? This is 20% of the decision.
- Idea. Oh yeah, tell us again what you are planning to do? While most entrepreneurs think their specific idea is everything, the top VC firms invest in teams and markets, and they assume that world class teams are smart enough on their own to figure out how to steer the right ideas through the right markets. (Ok, this is a slight exaggeration, but I'm trying to make a point.)
How you should evaluate VCs
- Have they been successful? Both as a venture capitalist over the long term (e.g., someone who has only a few hits during the dot com was probably just lucky vs. talented) and as operational executives.
- Are they ethical/confident/humble? Or when you first meet them and start comparing notes about people you both know, do they go out of their way to trash some people? How would you like to work with them, even when times get bad?
- What is the size of their current fund, will they be able to put in enough money for the next round, and to easily find additional investors for your later stages?
- Check their references! Ask successful entrepreneurs you know which VCs they like, and why.
- Relevance: can they add value to your market? Do they have any conflicts?