Different people will always judge you more harshly or more leniently, based on your relationship with them – and their personal agendas.
Remember the first time you made a sports team? In little league, no matter what you did, your parents yelled from the stands, “Good job! Good effort!” However, once you got to high-school varsity sports, your coach – whose job it was to motivate you to improve and win games – didn’t coddle you. He screamed at you, he drove you to work harder in practice, and he judged you on your performance – not on your effort. Your parents would never cut you from their team – your coach most certainly will.
Which brings us to venture capitalists, and how they judge the startups in their portfolio.
No matter how well you think your startup business is doing – based on subjective impressions from your friends, family and customers or on objective results based on your sales metrics – your VC’s determination is the final answer. Want to truly and accurately benchmark your company?
Evaluate it through a VC’s lens.
The Four Questions a VC Would Ask
When a VC firm makes an investment decisions, they are ultimately weighing two things – growth potential vs. risk. This debate is framed around four key areas or questions:
What is the problem your company is trying to solve, and what is the solution?
Without a problem, a real pain point that plagues many people, even the best solution will be a moot point. You need to make sure that the product or service your company offers solves important problems that make a difference in your customers’ lives. The problem and solution should also have high barriers to entry – not just anyone should be able to come along and solve this problem, thereby giving your team and idea that much more credence.
Your solution should also double as your value proposition – what is the one thing you can tell to potential customers about the value you provide that will make them want to stand in line and wait to buy your product? Your solution and value proposition should also be scalable – are there enough potential customers interested in order to scale your business?
A good way to evaluate your startup through this perspective is to talk to your existing customers:
How happy are they with the product?
How has having your product made a difference to their business?
Have they found any other possible solutions out in the market?
Are there many other companies that fit the profile of your existing customers that could potentially be future customers?
What is the market like for this product?
This is really where a VC would determine the true growth potential of your company. After all, this question will identify who your customers are, or will be, and how many of them there potentially are.
When examining the market, one big thing to evaluate is your competitors. Are there firmly established competitors who you are trying to steal market share from? How are you different from them? If there are no competitors, is there a vacuum that your company can ably fill, before other upstart potential competitors arrive? Being able to demonstrate market traction and prove that there is growth potential in your market is a great indicator of startup success, and something all VCs would evaluate for.
One way to do this, especially if your startup has been operating for a decent period of time, is to demonstrate the growth in number of opportunities that your sales reps have been working. A growing pipeline is a great indicator that your product has found a growing market.
Do you have a capable team in place?
The founding and management team is as important to your startup as a pilot is to a plane. Therefore, VCs will place a great deal of emphasis in evaluating your management team to make sure you really have the right people in place to help you scale.
A big part of this will be looking at where your management team came from. What were their previous experiences in the space like, and were they successful? Do they have any prior relationships with other VCs? When the VC asks around, will the feedback he receives on your team be positive?
If you have a co-founder with you, chances are you’re not going to replace them. However, other C-level executives and VPs can most definitely be replaced, if they are deemed to be ill-suited to the role and responsibility of scaling your company. The most critical position here might be the Sales VP – you have to make sure you have hired a great one who understands the nuances of your market, has the experience and knowledge to scale and commands the respect of his or her charges.
What’s your business plan?
Finally, VCs want to make sure that you have a real business plan in place, not just a great product and hopeful dreams. Talk about your sales process and why it’s the right model for this industry. Talk about your marketing plans, what campaigns have worked and where you plan to spend the bulk of your marketing budget going forward. Discuss your operational situation – are you fiscally responsible? Do you spend the money that you have wisely, with an eye toward scale and growth? Is your cash-flow situation amenable and sustainable?
A startup that has purged its limited initial cash reserves in an irresponsible manner will never receive additional investment, and is a sign that business isn’t going as well as it should. A key thing to remember here is that profitability isn’t necessarily important for early-stage startups – sustainability and scalability are much more top-of-mind issues, as far as a VC is concerned.
Evaluating your startup through a VC’s stringent lens will truly identify if you are heading in the right direction or not. Don’t hold back or pull any punches – be brutally honest in answering the aforementioned questions, and you will truly understand where your startup is.