
An Inside Look at how a VC Evaluates Startups - Thun
http://blog.thomvest.com/vcevaluatingstartups/
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malvosenior
This is a pretty old school take on VC evaluation (maybe because he hasn't
been a VC for very long?).

Things that matter in today's world:

1\. Team (how do they know you/what have you done)

2\. Traction

3\. Industry (to some degree, more as a blacklist)

That's pretty much it for anything Series A and earlier. If you don't have a
very high ranking in one or both of the first two categories, you will not be
raising money.

~~~
erichocean
I'd especially second #3, which _is_ a popularity contest. In my experience
(raised money twice before, doing it again now), it's basically impossible to
raise from VCs/Angels who are not actively looking to invest in your industry
already, no matter how good your business is.

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tryitnow
Another thing for entrepreneurs to keep in mind is that VC's deal with bigger
chunks of money these days. Angels have take on a lot of the early stage risk,
so if the process outlined in this article seems overly cautious or insular
it's because there's just no need for a VC firm to take on high risk, that
should have already been done by FFF and/or angels.

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vannevar
Has anyone gone back and attempted to correlate these scores with ultimate
success of the start-ups? Obviously there is the possibility (even
probability) of self-fulfilling prophecy, but it would still be interesting to
see if the scores have the potential for real predictive value, or are mere
rationalization.

~~~
Thun
Hi Vannevar,

This isn't an exact science and still has levels of subjectivity that make it
less of a predictive tool and more of a simple litmus test for the fit between
the startup and our investment focus. Just because we aren't a fit doesn't
mean that a startup will not be successful. Many of the companies that score
low will go on to do very well, and conversely there will be some high-scoring
startups that don't live up to expectations.

Thanks for the comment.

~~~
vannevar
Forgive me, but that seems like an awfully cavalier attitude towards a process
that you say you're putting a lot of time and effort into, and on which hinges
such large investments and potentially large returns. Hasn't anyone there been
curious whether the process actually works and how it could be improved?

------
shoham
Great article -- thanks for sharing this article, and these insights :)

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diolpah
Something I have noticed about the VC community is that it is very much
dominated by an insular mindset that only permits introductions by companies
that are already connected in some way. Companies without these connections
don't have a chance, regardless of idea, model, revenues, or earnings.

This article does a good job of confirming this reality, from the initial
introduction, to the diligence process. It's unfortunate that capital
allocation has turned into a popularity contest.

Not to detract from this article( I don't know if minor self-promotion breaks
HN etiquette )but I wrote on this topic recently, with particular emphasis on
the AngelList model: <http://haploid.com/post/10453313166/the-cool-kids-table>

~~~
ChuckMcM
This is an interesting perspective.

"This article does a good job of confirming this reality, from the initial
introduction, to the diligence process. It's unfortunate that capital
allocation has turned into a popularity contest."

I think you've arrived at the wrong conclusion, allow me to share an anecdote
which illustrates why I think that.

I came to Silicon Valley in the 80's and went to work for Intel. Intel at the
time joked they were the biggest semiconductor company in the world because
they were losing money less fast than everyone else. I had a freshly minted EE
degree and unlike many of my peers I actually had been building microcomputer
systems for 6 years already (I soldered together my own Digital Group Z-80
system in high school). As was their policy at the time, Intel started new
college grads (they even had a term NCG) on projects which gave them an
opportunity to demonstrate their strengths and weaknesses in a relatively
'safe' way. I was handed the 80186 to deal with but there were other, sexier,
projects using the 80286 and 80287 at the time. I thought at the time it was
'unfair' and possibly a 'popularity contest' that other engineers had the
opportunity to work on those projects in the spotlight when I was 'forced' to
work on what was, even then, a 'loser' CPU.

It was later, through a period of some introspection, that I came to realize
that it wasn't any of these things, it was simply time. Just like a finance
person is loathe to predict a trend based on a small number of data points, or
a scientist to come to a conclusion with a small number of samples, engineers
and entrepreneurs need 'run time hours' where they have encountered a variety
of situations and come away making good and bad decisions and adjusting
themselves appropriately. Better test scores, having the 'right' answer now
which is validated some time in the future, and being able to reason clearly,
are not a substitute for run-time when it comes to evaluating an investment in
people.

My conclusion was that what I characterized as a 'popularity contest' was
actually the 'understanding my strengths/weaknesses' relative to other folks
who might do the same job. The people who had a longer track record were
'lower risk' because the decision maker felt more confident in their
evaluation. So lets bring that back to the VC community.

So some times it looks like the VC community is a 'boys club' or a 'walled
garden' where if you don't know the right people or go to the right social
events you can't 'break in'. And when you do get the introduction but don't
get the investment, and that investment goes to someone who has worked with
the VC before, it doesn't feel all that great. And yet, from the VC's
perspective something completely different is going on.

So a VC or Angel sees your pitch, they pass, but generally they remember that
you pitched them something. If the person who did fund it, or if you boot
strapped it into existence, and they see that success they get a data point so
that the next time they talk to you, rather than being a 'new' thing, you have
some run time where they have a data point (your original pitch). So now the
discussion can be 'well we passed when you pitched Foobar tell us the story
between then and now.' That experience or outcome lets them evaluate your
capabilities in a much more objective light. Once you are a 'known' quantity
the whole tone of the conversation changes and it becomes relatively easier
both to get a meeting and to close a round of funding.

"But it's a chicken and egg conundrum!" is a common retort to this. It does
seem that way, but its not. Working in a startup (which is easy to do, just
apply) gives you visibility to entrepreneurs who got funding, and depending on
scale, to the people who funded them. Excelling in that environment will give
you a better understanding of what makes startups successful (or not) and can
give you insights into what you would do the same, or differently. While there
are always stories of people who turn a dorm room project into a big success,
the much more common story is someone who works for an established company and
invests in understanding how that works, then works for a smaller company to
get a grasp of how all of it fits together, and then perhaps co-founds or
bootstraps a company to see what they can do when they have more control over
the life and death decisions that startups face every month.

Now if you want to commiserate that it takes 3, 5, or even 10 years of 'minor
league' play before someone will trust you with their money in your own
venture. I hear ya. I would love to find ways to reliably evaluate the long
term success potential of someone with less historical data. Picking
entreprenuers who can execute their visions successfully is at least as hard
as picking out ideas which will be successful when executed well.

~~~
diolpah
I appreciate your detailed and involved response, and I appreciate your
experienced perspective. That said, I'd like to make a few points.

First, I suspect you're assuming I'm new to the industry or that I am working
on my first startup. In fact, I have done several, had a number of good exits,
and am currently building another profitable, growing business in a large
market. I am no stranger to building successful businesses, and I've put in my
time on the web developer's equivalent to the 80186 project.

Second, my experience is that success in building businesses in no way
translates to the kind of popularity or network that venture capitalists look
for. Your claim that simply working in a startup gives one visibility to other
entrepreneurs and those who funded them is not something I have seen. I have
seen tons of contact with vendors, customers, strategic partners, etc, but
never venture capitalists. They simply don't move in the same circles that
bootstrapped companies move in.

Mind you, none of this is sour grapes. We're doing quite well growing on the
basis of our own cash flow. We are happy to have never diluted ourselves and
we are happy to have full control over the board and decision-making. But if
we ever got to a point where we would like to accelerate our growth with
outside capital, there is a no door open to us in the VC community, because we
lack access to that network. Bank loans or traditional boutique private equity
firms would be the likely targets of our financing efforts.

Anyway, I enjoyed your story of your time at Intel - it's great to see one of
the "fathers" of early microprocessors here on HN. Thanks.

