What Do Investors Look For When Evaluating a Startup?
When you’re building a startup from the ground up, one of the first things you have to think about is whether you need seed funding. If you decide that’s the best (or necessary) route, then the question becomes: How do you win the attention of the right investors? There are just about as many answers to this question as there are angels and venture capitalists. Each investor looks for their own unique set of ingredients to help them find founders and teams to invest in.
In the end, many say their decisions involve an indescribable “gut feeling.” But, there are a number of factors many do consciously look for. Below, you’ll find some of the most illuminating responses from our Product Hunt LIVE Chat series. We hope this collection of insights from top investors will help you find success as you seek funding for your own venture.
What do you look for in the sales and marketing teams of a prospective investment? — James Meincke
I am looking for evidence that they understand funnel math. Funnel math starts with the desired end point, which might be we need to close 100 customers in this particular quarter. It then uses known—or guessed at—conversion rates to figure out how many demos (or whatever other stage precedes orders) to get to that number of closed deals. Then, it works backwards to qualified leads, and then earlier in the funnel.
I am looking to see that they have clearly thought through how many sales reps are required, as well as what their productivity [needs to be], including the ramp time, to support that number. Then, what marketing activities are needed to provide that lead flow? When I see that, I usually know the company is in good hands. The great thing about funnels is that they are about optimizing only two major variables: flow (i.e. number of leads at each stage) and conversion rates. And two minor variables: cost of processing a lead, and time to get a lead all the way through the funnel. — David Skok, General Partner, Matrix Partners
How much growth you would need to for your pitch to stand out above the rest? — Mike Hince
It really depends on the category/business. But for most companies, month-over-month organic growth is a very useful metric. Depending on the base, 20–50% MoM growth can be good — retention, referral, and churn are all things we look at, too.— Aileen Lee, Founder of Cowboy Ventures
How do you make decisions about who to invest in? — CK Yap
I’m still an Associate, so ultimately the final call is made by the GPs. With that said, there are founders that I strongly advocate for in the Investment Committee meeting, and there are a few things I love to see:
1) That the founder is passionate about what he/she is doing and believes that it is important and can help people and businesses be more effective, productive, and happy.
2) That the founder has done his or her homework — coming unprepared or unknowledgeable about the market and space is a major problem.
3) That there is some traction and skin in the game. I like to see someone who is really betting on their team and what they’re doing. — Michelle Tandler, Associate, Trinity Ventures
What are the top three attributes that you look for when deciding to invest or partner with someone and why? — Laurie DesAutels
First, you have to get my attention. It’s your job to engage us when you walk into the tank—and if you can make me listen, I’m interested! Then you’ve got to know your numbers and you have to have drive. I want a resilient entrepreneur that’s going to push me as much as they are wanting my advice/guidance. — Robert Herjavec, Shark on ABC’s Shark Tank
What qualities do you look for in a founder before deciding whether or not to invest? — Emily Hodgins
There needs to be good alignment between the founding team and the solution they are building or pain point they’re addressing. Some of our companies are founded by people with deep domain/functional expertise who are well suited to build a particular solution. Others are founded by people who very personally understand the pain point they’re solving. Some have both. They have to have at least one. — Lauren Kolodny, Principal, Aspect Ventures
What do you look for/what is your process when analyzing potential companies to invest in? — Paulo Braga
There really is no one size fits all for companies. I try to take a very business view on startups to really understand whether the team, idea, product, etc. can produce a great business. Focusing on business fundamentals even at the earliest stages has become more important than ever because of the amount of competition these days. I think accelerators can be good, but often times I don’t see founders doing their diligence with folks who have been through the program already. The best piece of advice I can give is to do your diligence so you can make an objective decision on whether the program(s) are right for you or not. — Hiten Shah, Co-founder, Crazy Egg, KISSmetrics, & Quick Sprout
It it true that many VCs know if a pitch is worth consideration within the first 30 seconds? What’s the average time you spend reviewing a unsolicited slide deck pitch? — Vinay Khosla
Thirty seconds is a stretch. Within a few minutes, you often sense the excitement and vision of a team and start really “leaning in.” After doing this for 13 years, I have a good sense of a team when they walk in and how they talk about market size and product — but it still takes me a full meeting of 30–45 minutes to decide if I want to dive in. There have been several times where I’ve offered to invest after just the first meeting, but typically it’s a decision to spend more time together. Different entrepreneurs have varying styles, and no single style is necessary for success in startups.
Unless I get a warm introduction to a founder with an unsolicited slide deck pitch, I don’t spend much time at all reviewing it. There are so many ways to get in touch with me; I want entrepreneurs to display hustle in reaching out! — Bryan Deeter, Partner at Bessemer Ventures
When you’re looking to invest in a startup, what are the key elements that you’re looking at? — Liat Mordechay
Since we do seed and early stage investments, the answer is very simple: People first and foremost. Ideas come next, and the potential market comes third. I think seed investors who are in for the long haul need to love the entrepreneur [enough to] have a fair and honest and constant communication while building the company. — Om Malik, Partner at True Ventures & Founder of Gigaom
What are the indicators you look for, when scanning hundreds (if not thousands) of startup pitches? What is your preferred format of a startup pitch? — Victor Polyushko
I’m going to attempt this with the caveat that there are always additional details to consider depending on the space the startup is innovating in. In no specific order and across different spaces, I look for:
- Clarity in understanding what user value the product is bringing to the market and the distinction between that and the founding vision (one that’s greater than the product vision helps me be inspired that the founders understand the journey they are embarking on).
- A consistency of that user value articulated by the founder and the message that users describe the service or product with.
- A team that’s self aware about why they can understand that user value best and how to keep that up (either belonging to the exact user demo, unique context, data centric product iteration process, etc.) — Jonathan Teo, Managing Partner at Binary Capital
When evaluating new potential investment opportunities, what are the top five questions you try to answer before making a decision? — Thomas Stocklein
When I meet with a founder, I’m trying to get to know them and understand what motivates them. So much in a startup is mutable — except for the founders. I want to understand what is driving their desire to do something which, honestly, will most likely end in failure. Do they have an understanding of what they are building that gives them a unique advantage? And then you test this knowledge. You try to understand whether or not they have a learning mentality. And you want to understand how they respond to criticism or viewpoints that contradict theirs.
There isn’t a set of five questions that provides a perfect path to these answers. Meetings are directed conversations, not inquisitions. But one thing I do want to point out is that as a seed stage investor, I spend little time on product details for the sake of product details. That is all guaranteed to change by the time an investment is actually made. — Kent Goldman, Founder at Upside Partnership
When you invest in a seed round , what are the most important metrics you look for in a consumer software startup? — Matt Silverman
- Is there a shipping product?
- Are there users or customers?
- What’s their experience like? Is it easy to “activate” or engage with the product or service or app?
- How many users or customers are “active” and keep coming back? What does retention look like?
- Are the unit economics cash-flow positive, or can they be in the near future?
- HOW DO WE GROW THE BUSINESS? What channels are currently working, and scalable, and profitable?
- How do we get to sustainable/scalable growth, or sustainable/scalable revenue?
- Are we sure the business will have downstream investors/acquirers?
Also:
- How do I feel about having lunch with this founder several times a year for the next 5 years? Some things aren’t always analytical, and life is too short to work with assholes — except me, of course. ;) — Dave McClure, Founder of 500 Startups
There is no shortage of startup advice out there, including thoughts on what investors look for when they are making funding decisions. Weeding through the noise to find the best advice, however, can be a challenge. You can find top-notch insights from incredible investors on Product Hunt LIVE—so join us for an upcoming chat and ask your own burning questions!
