Check out this interesting infographic from Anna Vital in San Francisco. She is in the process of fundraising for the Kickstarter campaign “Becoming an Entrepreneur” infographic book. It’s a great way to graphically distill information which lends itself well to describe processes like the decision making process of a VC, but more importantly, as the number of entrepreneurs worldwide grows, Infographics could help dyslexic entrepreneurs to access the valuable insights that are currently “locked” in books or blog posts. The idea came to Anna as she is dyslexic herself.
To get inside the mind of an early stage venture investor, Anna talked with Jeff Clavier (SoftTechVC), who invested in 140 companies and manages a $55 million fund, and documented the early stage investment analysis process. Jeff’s “3 Asses Rule” sums up the big picture: early stage startups need to convince VCs of 3 things when pitching: (1) they have a bad ass team (2) a kick ass product and (3) a big ass market!
What goes in to that decision? Jeff lists the 12 factors he takes into account when making investment decisions. Founders could look at it as a template for their pitch (or business plan).
The mental process VCs go through to evaluate an early stage venture
- Team - size, composition, level of technical talent in the team. Ideal combo? 1 developer, 1 designer, 1 business guy.
- Product - don’t come with powerpoint only. Alpha product released is much more credible. If you have a product, be ready to demonstrate how you acquire and retain users.
- Traction – Product-Market fit. feedback from early users (retention numbers speak by themselves). If it’s a revenue generating product, how much money has it made so far?
- Market opportunity – the opportunity is measured across 3 years. going to a more macro level, is this a consumer or an enterprise product?
- Valuation – the main concern on the valuation in the seed round, is the founders ability to raise an A Round 18 months from now. Trying to find a balance between the startup and VCs who will invest in it.
- Funding – funding so far and how long does the VC think it will last.
- Founder dilution – will the founders stay motivated in the long run? Jeff provides good benchmarks at what dilution founders can expect across the different rounds: accelerators (5-10%), Seed (10-25%), A round (20-25%)
- Other Investors – the interesting point here is the number of people in the cap table (5-15) – “helpful angels” – can they contribute their expertise, connections, time? Traditional VCs (only 1 “if you must”) – worth considering the signaling challenge of taking seed money from traditional VCs – if the fund doesn’t follow on for whatever reason, it sends a negative signal to other VCs.
- Funds contacted - interesting point – don’t talk to my direct competitors if you want my money. The number of funds a startup contacts also matters… the more funds see the startup (and don’t convert to investors), the less attractive it becomes.
- Cost of funding – closing rounds costs money. Transaction and legal fees are something to consider when raising a seed round. Jeff lists the costs – $5,000 for incorporation, $20K-$30K for an equity round, $30K-$50K for other rounds. When the round is “only” in the range of $05M-$1.5M and the future of the startup depends on the founder’s ability to raise subsequent funding, deal costs are a consideration.
- Is it working? – an investor would want to evaluate the chances of the company growing to become a large company – the VC route – raising subsequent funding, making key hires etc. On the other end, what happens if that proves unfeasible? Are the founders willig to sell “early” or be “acquihired”?
- Showstoppers? statements from the founders can trigger a red light with early stage investors. No clarity on the product roadmap and unrealistic expectations (i.e “Google will buy us in five years”) can be a showstopper for the entire deal.
Check out the audio conversation with Jeff and more startup inforgraphics from Funders and Founders:
If this is just one chapter, I can’t wait to read the full book!