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If you ask most VCs what they look for in a startup they will say great team, great product and great market. Then, if you press them for more detail most will say that for them the team is the most important (although I think they say that at least partly because it’s what entrepreneurs want to hear). Marc Andreessen wrote about this once. He was on the money when he said that for early stage investments having a great team is most important but for later stage investments the market matters more. That’s because when a company is young there is little in the company except the team whilst more mature companies have customers and a brand that tie them to a market.
Early stage investors like Forward Partners look for a minimum of a great entrepreneur and a great idea. Like many others we believe that at the heart of every great business there’s a great entrepreneur so that’s the first and most important thing to check off the list. A mistake that I’ve made in the past is to think that with my help an average entrepreneur with a great idea can be successful, but I’ve come to understand that that’s a conceit. All that said, it’s crucial that the great entrepreneur comes with a great idea otherwise the investment is likely to be wasted. There have, of course, been many instances where great entrepreneurs have pivoted away from their first idea and still been successful, with Kevin Systrom at Instagram being perhaps the most famous recent example, but that doesn’t happen often enough to bet on and it remains a mistake to invest in an entrepreneur, however good, if you don’t believe in their idea.
Much has been written about the character traits of great entrepreneurs so I won’t repeat that here (this post from Mark Suster has a good list) but I will say that in addition to those traits we want to see they have something special which gives them an unfair advantage for their chosen opportunity. Most often that’s deep domain experience. A great idea is for a company that can be a leader in a sizeable market, has enough upside potential to return the investor’s fund and can get far enough with the money to raise the next round.
As businesses develop investors start to think about execution as well as the idea and the team. The first evidence of good execution in my book is the work done to understand the customer and the problem, then slightly more mature companies should have prototypes and first releases of the product to show, and after that they should demonstrate traction and growth. Across all these areas the execution should evidence rigour, discipline and clear thinking.
Now you know what investors are looking for you might be wondering how to approach them. It’s been said many times before but the key is to build a relationship over time so that when you get to the point of asking for money you are asking somebody who already knows you, and hopefully likes you and your idea. The effort the investor puts into building a relationship with you is a good indicator of how likely they are to say yes when you finally come asking. The best way to to get a relationship started is with an introduction, but interacting on social media, networking at cocktail parties and attending office hours or other drop in sessions also works.
My final piece of advice is to understand that most good investors are incredibly time-poor – they are inundated with requests for calls and meetings and only have enough time to say yes to a very small percentage. Moreover, those ‘yesses’ will naturally skew to the people they already know and know well, making it tough to break in. It’s fine to ask for a meeting, but be prepared to begin the relationship with an email conversation. If you are approaching an institutional investor then people who are new to the firm and/or more junior often have more time, although maybe less influence.