What VCs Are Looking For

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    21-Oct-2014

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Recently I gave this presentation to a group of 325 entrepreneurs at Tech Coast Angels event in SoCal. The focus of the presentation was three-fold: 1. What motivates VCs. This will allow you to understand what drives them as you pitch to them so your interests are aligned. 2. What do they look for in promising entrepreneurs and teams and 3. How do they think of promising markets. Once you understand this, you will be able to review your pitch and business to get most out of your interactions with VCs and your funding pitches.Happy Entrepreneurship!

Transcript

PowerPoint Presentation

Introducing..

22 TopVC Funds

28 TopVCs

Roelof BothaSequoia Capital

Mike MaplesFloodgate Fund

George ZacharyCharles River Ventures

Sean DaltonHighland Capital

Howard MorganFirst Round Capital

Tim DraperDFJ

Harry WellerNEA

David CowanBessemer Venture

Mitchell KertzmanHummer Winblad

Scott SandellNEA

Gus TaiTrinity Ventures

Steven DietzGRP Partners

Ann WinbladHummer Winblad

Jim GoetzSequoia Capital

Roger LeeBattery Ventures

Ken HoweryFounders Fund

Eric HippeauSoftBank Capital

David LeeSV Angel

Ted AlexanderMission Ventures

Robert KibbleMission Ventures

Jim BoettcherFocus Ventures

Kevin McQuillianFocus Ventures

Mike HodgesATA Ventures

Alan PatricofGreycroft Partners

Rich WongAccel Partners

Vish MishraClearstone Partners

Randy KomisarKleiner Perkins

Peter WagnerAccel Partners

8 Amazing Founders

Alex MehrZoosk

Osman RashidChegg

Michael BirchBebo

Paul ScalanMobiTV

Alfred LinZappos & Sequoia Capital

Kevin HartzXoom & Eventbrite

Rajiv LaroiaFlarion

Ben ElowitzBlue Nile & Wetpaint

70+ Most SuccessfulStartups

One Question:Why so many startups fail while few defy all odds to become billion dollar successes?

Whats their secret sauce?

35 Experts Answer:

Straight from the gut talk on startup successes & failures.. war stories behind top startups

What you will learn:Why startups fail?

What are the most common pitfalls you can avoid?

How to pick winning ideas and markets?

How to build winning teams?

How to pick investors?

When to ramp up or down?

When to sell or grow to IPO?

How to recover failing startup?

Five Must-Know Facts for Entrepreneurs

Big & Bold Idea (Non-consensus idea)

A.I.M. (Authenticity, Integrity, Motivation)

A+ DNA (Winning Team)

R.I.P. (Rapid Iterations & Pivoting)

Objectivity & Adaptability

1. Big & Bold Ideas

Non-consensus and unconventional ideas are in fact less riskier and more likely to succeed.

So Dream Big, Be Bold & Go For It

2. Authenticity, Integrity & Motivation

Purity of your passion and integrity combined with 10k hours leading to authenticity serve as talent magnet to attract best in business to join you

So A.I.M. high

3. A+ DNA

Startup success is all about people. Passionate and authentic entrepreneurs attract A+ team and build winning cultural DNA

So never settle for anything less than A+

4. Rapid Iteration & Pivoting

Hardly any original business plan made it to final winning product. Fast trial and error is key to land product-market fit.

So iterate and pivot at very high RPM & with Small Turning Radius

5. Objectivity & Adaptability

Be passionately disinterested by actively looking for truth without bias about outcome. Then accept and adapt.

No idea is worth billion dollar so listen to the data and market

20

Whats Driving VCs?

LPs invest usually 5-7% of their asset in the VC fund for diversification. Venture Capital falls within very high risk high return asset class

VCs need to deliver very large returns in line with the objective of this asset class

Most investments will failfail to either return principal or give mediocre 1-2x returns. Thats a failure.

VCs manage a fund for their investors called LPs or Limited Partners

But one or two investments, if picked right, can give 10-20-100x returns and more than pay for all other investments

Copyright VCs At Work Tarang Shah

Thats what drives VCs. They want to be part of building that next Google, Groupon, Facebook, LinkedIn, Twitter that can deliver 5-10x return on the entire fund. Thats success.

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What do VCs Look for?

Market First

Most VCs are in either Market First or Entrepreneur First Category

First identify promising market

Look for promising team than can execute in that market

Entrepreneur First

First identify promising Entrepreneur

Follow their lead into promising market opportunity

22

What do VCs Look for?

Billion Dollar Market

You need both great market and great entrepreneur to build billion dollar startup..

Promising Entrepreneur

SuccessfulStartup

Successful startup happens when a great team collides with a billion dollar market opportunity...

VCs are looking for startups that are positioned well for this collision.

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What do VCs Look for?

Copyright VCs At Work Tarang Shah

Extended Team

Scalability (Sales, Business Model, Product

Core Team

Product/ Idea

Market

Cofounding Team

Stage 0Formation

Stage 1Build & Prove

Stage 2Grow & Scale

Funding Type

How Much?

Typical Valuation

Dilution

Seed

Super Angel

Series A

Series B

Series C

Series D, E, F

$50-500k

$500k-2M

$3-7M

$7-25M

$15M+

$25M+

$1M

$3-5M

$5-10M

$15M+

$50M+

$100M+

25-40%

5-10%

???

Product-Market Fit

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Combination of Charisma, authenticity and genuine passion creates a talent magnet to attract best in business to join him

Anatomy of Successful Entrepreneurs

Balanced Ego Big ego to pursue unconventional ideas but in-check ego to surround with people smarter than him

Authenticity Product view informed by 10k hours of tinkering; deep experience that provides insights into the fine nuances of market and customer

Passionate Disinterest Passionate to seek out the truth but not biased about the outcome highly objective

Big & Bold Head The World is Not Enough ; Not afraid of non-consensus view

High Integrity Transparent and Trustworthy

Real Visionary Can see the whole company beyond current product

Genuine & Avid Passion to solve the problem and make a difference -> A Missionary

Personal Relevance to the pain point being solved motivation beyond making money

Iterative Not afraid of failures but like Edison enjoys discoveries through methodical trial and errors

Extremely Focused breaking vision into short-term metrics and single-mindedly pursuing it.

Big Ears Listens actively and intently to customers and analytics

Copyright VCs At Work Tarang Shah

Anatomy of Successful Cofounding Team

Complementary Skills (e.g. business, tech)

Reduces frictionCreates multiplier effect

Proven Chemistry

Extremely important to get past small and big differences that will ariseKeeps focus on winning as a team

Past Successful Working Relationship

Working relationships and structure is pre-determined and can hit the ground running quickly

High Potential Cofounding Team

Becomes a talent magnet to attract core team

Reduce the risk of dissonance and hence risk of failure

Hit the ground running from day 1 than work on chemistry

Copyright VCs At Work Tarang Shah

26

Anatomy of World Class Team

Surround yourself with people smarter than yourself key is not to get intimidated or feel insecure around smarter people

Hire for Cultural fit as much as functional skills

Hire People you have worked with well before

Lift the quality of team with each hire and fire

Hire people who can start adding value day 1 No time for training

Hire unfettered passion without ego & restrictions of past learning

Fire promptly and amicably someone who is not fitting well

Six rules of smart team building

Copyright VCs At Work Tarang Shah

27

Identifying promising new markets

Changing Customer Behavior

Promising new markets are usually formed at the cross section of changing customer behavior and new technology

New Technology

Highly Attractive Market

Supporting Infrastructure

28

Youtube is a great example of this. Sequoia partner Roelof Botha provides great insights about this in the book.

Changing Customer Behavior

P2P Video sharing as a new customer behavior was reaching a tipping point in 20052004 Asian Tsunami UGC video sharing showed market timing was right

New Technology

Availability and mass adoption of handheld camcodersFlash made is easy to watch videos right into internet browsers

Supporting Infrastructure

Broadband and PC penetration provided widespread infrastructure for creation and sharing of UGC videos

Highly Attractive Market

Creation of billion dollar UGC video sharing market

Identifying promising new markets

29

Identifying New Promising Markets

Every new platform that embeds itself becomes a fertile ground for sprouting next group of billion dollar startups

Transistors

Chips

1950

1960

1970

1980

1990

2000

Micro Computers

PCs

Intel

AppleMicrosoft

3Com

Cisco

NetscapeeBayAmazon

???

IBM

LANs

WANs

Internet

Mobile

30

What are some of the Emerging Platforms Today?

Smartphone

iPad/ Tablet

PayPal

Amazon

???

Facebook

Twitter

???

31

Making of New Markets

Horse

Collision of two technologies spawns a new species

Donkey

Mule

Flarion (acquired by Qualcomm for ~$1B) is a great example

Wireless and internet were evolving as two different silos and needed to be brought together to make rich media internet work on wireless

32

Disrupting Established Markets

Fat Cats

Creating 10x advantage with new technology

New Technology

New Lean Mean Cat

Stagnant, Non-innovative and Non-responsive lazy cats

Leveraging Technology to create 10x value-add over incumbents

Fat Telcos

P2P Sharing

Skype

Blockbuster

Internet

Netflix

Shrinking a dollar to make 10 cents (e.g. internet ads)

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