Start-up Entrepreneurs' Blog

What Are Venture Capitalists Looking For In A Start-Up

March 24, 2011

As an entrepreneur, your hopes of attracting start-up funding are high. You’re anxious to get moving in a big way. The obvious next step is to seek out venture capitalists, they have the money to launch your idea with gusto.

You saw a problem, devised a solution, defined a plausible business model, and maybe even launched a seed stage company. The time has come to present the new product concept to the investment community in hopes of attracting funding to further the new business.

And nothing. Investors aren’t interested. The funding never materializes. You become frustrated and disillusioned as an entrepreneur. The idea dies and a painful experience.

I’ve seen this scenario many times over. Over the years, I have gone to venture capitalists for funding not only for my own projects, but for those of others. These days funding is difficult. So I concluded a different approach than in the past was needed.

I decided to look at the venture capitalists as a true customer, and to engage with them through a more traditional sales process.  My goal was to find out the specific profile of start-ups that they were willing to fund.

I contacted venture capitalists I knew from previous projects. Mostly because I knew they would be willing to speak with me and were more likely to be direct with their answers. First step, as in any sales process, find out what are the customers’ problems and see if you can solve them.

Overwhelmingly, their biggest challenges were finding limited partners for their funds so that they could in turn invest in start-ups.

Their portfolio companies were taking longer to exit and make their return to the investors, which of course, is affecting the venture capitalists ability to attract limited partners – a vicious circle.

I got it. Their primary concern was keeping the venture capital firm alive, not finding start-ups to invest in.

The good news was some were still are investing in new start-ups. Great, that’s just the positive response I wanted to hear, onto the next line of questioning. Everyone has a profile of their ideal candidate, their ideal start-up – one that’s a perfect fit.  Here’s where the conversation became disheartening

They could tell me their target market segments. It was no surprise that it was software, mobile, Internet, clean tech, life sciences, and green tech. That’s a nice general statement. But when I probed further about the specifics, I got the following statement, “We don’t really have a specific profile, but when we see it, we’ll know if we like it.”  I tried to probe deeply, pull out the details, but nothing.

This was not helpful. An entrepreneur could spend a lifetime brainstorming, researching various product concepts, outlining a business case, starting the feasibility process by creating a seed stage company, and never get funded. Imagine a customer going into Baskin-Robbins Ice-Cream Store and the clerk asking the customer, “What flavor?” What if the customer said, “I don’t know, something good, something different, maybe a truly new flavor, maybe a twist on an old flavor, let me sample until I taste something I like.” It’s no wonder only 1% or so of proposals get funded.

On the one hand, not giving a profile keeps an open-mind because we all know that once a set of metrics is defined, people only care about meeting the metrics and ignore everything else. On the other hand, it makes it really difficult to come up with an idea that’s fundable.

As one venture capitalist put it, “You should ignore what we say and look at what we do.” Somehow I think there should be a better way.

Filed under: Start Up Funding

Tags: entrepreneurs, Start Up Funding, start-up sales process, venture capital funding