How VCs Evaluate – Part I

Consider Mikail, a college student. Right now he’s in the middle of completing a new tech product – a web platform that will connect worldwide users with a shared passion in arts and literature. Thankfully, the prototype has garnered positive feedback, feeding him the extra zeal to dedicate more efforts on the project. However, regrettably, being a college student, neither he nor his co-founder can afford to invest a good sum of money to scale. Bootstrapping for almost around a year, Mikail believes he now requires financial and strategic support to turn his vision into reality. It’s about time he came out of the shoe-string budget. It’s about time for seed funding.
Mikail is not alone in this mission. There are several entrepreneurs like him who are arising out of Bangladesh, much more around the world, seeking equity investment. But let’s face it: VCs mostly invest in avenues from where they can earn healthy earnings. From large investors such as the highly acclaimed ‘Shark Tank’ to small firms, everyone’s  prime motivation remains the same – a slew of money! However, is it the only criteria that gets their juices flowing? Well, not really. Research suggests, before making any investment, there’s a lot more that goes into a VC’s thought process. What are those considerations?  What makes a product or company desirable to a VC? How do they evaluate these deals? If Mikail were to pitch his product to investors, how would they react?
Drawing on my fair share of interaction with VCs home and abroad coupled with knowledge collected from external sources, I have understood that there are 5 broad buckets that VCs look at. While expectations and weights in each phase (start-up, growth, mature) vary between different stages (founding, seed, series), for the purpose of this article I will shed light on a start-up’s evaluation. In this part, I’ll mention about the first two; the rest, I’ll feature in part 2. Without attempting to sound too technical, here’s my take on the checklist.
Team – One of the first things VCs would want to know is who’s behind an initiative. What’s the founder(s) background? Do they have enough education and/or skills to work on the idea? Once determined, they would want to know the motivation behind creating this project. Why does a person care so much about this idea? What triggered his instincts to sacrifice other priorities? Answering these questions will reveal values, culture, and chemistry espoused in the team’s DNA. Closely linked to this is the issue of flexibility. Are the founders willing to adapt to potential changes? How do they envisage navigating through ambiguity? Each item on its own merits a certain degree of importance.
Market – VCs typically are fond of big markets. The bigger, the merrier. They’d like to understand how many users will the product generate on a year by year metric. What is the pathway from zero to volume sales? Is the market niche or is the product catered to multiple audience? Ideally, VCs don’t want a start-up’s focus to gear around a gamut of people. Spreading out too thin signals lack of focus, misallocation of resources, and loss in productive time and energy. From an industry standpoint, they would assess how high are barriers to entry and to selling; level of competitiveness; demand potential, among others.
To be continued…