One reason why VC firms earnestly look at deals that I drive is not just their faith in my level of competence, scrupulousness and fussy due diligence initiatives; they come with “I-know-the-entrepreneur” stamp. Ho-Hum, how does that matter? Read this.
Some of my favorite principles in screening deals –
a. Premium on experience – I avoid teams that has just youthful enthusiasm. I would any day place a premium on experience. A venture backed by a mature team that has deep domain skills and expertise is always, always better than a bunch of upstarts with hollow passion. The youthful team may certainly have some `cool’ quotient about it, but I would settle for teams that have a higher chance of hitting big time. Youth loses its cheer after first few setbacks that can’t be wished away; experience is more resilient. “It’s my investors’ money on the line; that’s as good as my own.”
b. Fee Filter – “Can’t afford $2500? Don’t suck up.” That’s pretty much in-the-face, right? I wouldn’t have it any other way. Teams that start up with scanty bootstrap will not survive to see beta, is what I think. No point in wasting precious time with teams that want `FREE’ consulting; “brainsuckers” as I call them. So I quote my engagement fee upfront that gets rid of a lot of milk babies and some nags. Most beavers don’t ping back (and serious teams do sign up). Seldom do they get far in their venture if they can’t engage a $2500 independent professional to scan their faint idea, vet up the opportunity, run viability checks, beef up with industry survey, forge out a sound business plan after several rounds of brainstorming and vouch for the team before connecting them with an investor that has a fair grip over the domain. “All of this costs money, pal. So, call me only when you’re ready.”
c. Technology that sells – Most founders begin with a big fuss over their technology. Scratch the surface and you’ll find that it is the 25th idea with the same theme. I tell them openly it’s of no use unless their business model screams customers. Keep your tech to yourself; give the customer a sexy application that rids him of worries, costs and complexities. “Does your tech do something of the kind? Then let’s get talking.”
d. No investor bets on vaccum – Technology business is not loaded with physical assets to salvage sunk capital. No large swathes of land, building or fixed assets as in a standard manufacturing operation. The big bet is on the juicy idea and execution skills of the team. If your project is meaty on these lines, you’re sure to get funded as well. I don’t mince words. I advise them to save up, start something small and then pitch for the next big thing. “Do yourself a favor; stick with that sucky job.”
e. Track record – “How many deals have you closed?” This question makes me smirk. You don’t close startup deals with investors as fast as you do large Private Equity deals. PE deals are closed faster because it is done with listed companies that have a track record. To that extent, the risk is limited. Investors get to control a real business. They can replace the sloppy CEO with the best-of-breed that can turn fortunes around. But startups are concept bets. They take time to mature, undergo cycles of refinement that makes the diligence process tighter and hence, tardier. I don’t let them pitch unless I am satisfied of their pitch worthiness. Then investors come up with their own set of observations that make them go back to the drawing board. It’s an iterative process. It’s gotta’ be, because in the end somebody is gonna’ put his money on the line. “Remember, your parents refused to bet their farm!”
f. People traits – I co-habit with the founding team for quite a while when I prepare them for the pitch. It helps me in getting to know them personally upclose. That awareness is essential since it yields early clues into their lifestyles, habits and attitudes which are equally important to an investor as are their domain strengths. “Can I trust this team with my capital?“ I realize it would’ve been yielding fair returns elsewhere and I’d better give them a good reason to take it out and invest in a startup. If you move closely with the team and influenze them positively as much as I do, you most likely will get the answer – “Trust them with the best you’ve got.“
So now you know why investors don’t trash the deals I drive; why fewer deals qualify!