As an entrepreneur, landing a deal with a venture capitalist is both exciting and incredibly difficult; in the simplest terms, you pitch your business plan and receive the almighty investment or you get an easy “no thank you.” But what if you could get inside an investor’s head and understand exactly what they are looking for? If you want that million dollar offer, this is a must read.
Sean Jacobsohn is a venture partner at Emergence Capital Partners as well as a co-founder and co-president of Harvard Business School Alumni Angels, the world’s largest university-affiliated angel group. With over thirteen years of executive experience in the tech industry, you’ll definitely want to read what he has to say on how a VC firm operates and thinks. Courtesy of VentureBeat, Jacobsohn takes us into the mind of a VC firm.
Jacobsohn starts with the “leads.” He explains that for every ten investments, the average VC firm reviews about 1,200 companies; they connect through networking, conferences, portfolio company referrals, seed investors, and those proactive enough land a meeting. To decide whether to meet with your company, VCs ask themselves a series of questions like:
Do they have the skills and experience for their venture?
Is their pitch concise and compelling?
Does their company compete with a current portfolio company?
“Personally, the primary reason I don’t meet in person with in-bound requests is that the entrepreneur was not vetted by someone I trust. “
In terms of meetings, only 500 of those companies will actually get a “face-to-face,” and the pass rate for this process is only 10%. Here, a VC firm will look for a proven product/market, a business that will have a customer base outside of Silicon Valley.
“One of the reasons that a meeting doesn’t go well is that the founding team will say they expect $50 million in revenue in 5 years, but they have difficulty articulating how they’ll get to their first $1 million.”
For the ten percent that pass the first meeting, around 50 companies a given year, the firm begins its “due diligence” phase.
“Due diligence consists of a product review, customer references, executive team references, financial modeling, market analysis and competitive analysis. Passionate customers who are very engaged with the product can really make a difference during due diligence.”
In due diligence, the VC firms looks for at least 100% annual growth in the first few years and are turned-off if the customer base isn’t solid enough and too concentrated.
Of the 50 companies that make it past the “due diligence” stage, only ten may receive investments.
“A couple items are critical, such as efficient customer acquisition and a magnetic CEO that people follow. It’s a huge red flag if former employees don’t want to work with the CEO again.”
To give you an idea of the market size your company needs to shoot for, Jacobsohn explains:
“…at Emergence, we like to see a reasonable path to $100 million in annualized revenue. For an industry focused solution, a $300 million market size is sufficient since if they become an industry standard they can get 30 to 50 percent of the market. For a horizontal solution that solves pain points across industries, a company needs $1 billion market size, since the market leader may only get 5 to 10 percent of the market.”
For all you entrepreneurs out there who think you are close to landing that investment, check again. Where less than one percent of companies actually get funded by investment firms, you really have to be the best of the best to become another success story. Good luck!