How do venture capitalists evaluate startups?

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JASON LEMKIN

Let me give a higher-level learning.

Ultimately, most (not all, but most) VCs have to invest in the Best Companies They Can.

Because there’s a clock.

Most VC funds want to finish their primary investments, their first checks into new companies — within about 36 months, sometimes less.  (Those funds will keep writing checks into existing investments for another 7-10 years after that).

Back into that, most VC partners need to do from 1-3 investments a year, with perhaps an average of 2 per year.

That means … at the end of the day … each year, they have to invest in the Best One or Two Companies that (x) they meet (y) that fits their stage / model, AND (z) that will take their money.

The better the deal flow, the better the companies you see that will take your money — the reality is, the evaluation changes.  Even if the criteria are seemingly similar.  If you got to meet Uber, Zenefits, AirBnb, Stripe, etc. and pick from them — that’s one thing.  Most VCs don’t.

Most VCs only see a handful of truly great start-ups a year.  And most VCs can’t get into the best deals / win deals.

So the real truth is, most VCs are playing against the clock.  They invest in the best they can in the time they have.

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Published on December 15, 2015
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