What VCs are Really Looking For: A Super Simple Guide

Q:  What do venture capitalists look for in startups to grant them seed funding?

Simply put:  Seed VCs are looking to make 100x their money.

Founders just don’t get this, and as a result, their pitches are all wrong.

Roughly:

  • Seed investors are looking to make 100x (or more) on an investment. Not every time, maybe just 1 time per fund. But given the risk and the loss rates, they need their winners to be worth 100x the price they pay.
  • Series A investors are looking to make 10x (or more) on an investment. Some will still be a loss, some will just do OK, but if the top ones make 10x or more the investment, the fund can still make decent returns.
  • Late-stage investors are looking to make 3x-4x (or more) on an investment. VCs investing at $1B are expecting you to IPO at $4B or more.

Folks would like to make more, and the best do. VCs also make less.

But this is what they need to make, not on every investment, but on their top investments to make money.

Now, it can be hard to of course know for sure at the seed stage (or even any stage).  So VCs look for potential signs of a 100x return:

  • One of the best potential teams.  They sometimes do amazing things.
  • Early but strong traction.  Even if it’s very early, e.g. just a few thousand in MRR even, that sometimes can suggest a 100x outcome.
  • Proxies.  It’s not enough just to go through say YC.  But it helps.  Why?  It shows successful people think you have at least a chance.  So does top angels investing in the seed / angel round.

So your pitch and the opportunity need to have a chance to do 100x or more. Maybe a 1%-2% chance. But a real chance.

 

A related post here:

2 Cold Emails I Funded For Millions

Published on February 18, 2021

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