Venture capital is a time-management profession. Every month, you evaluate hundreds of businesses through powerpoints, tech publications, referrals, events, and others. Without quick instincts, you’ll lack the bandwidth to assess each of these companies. Interviews are designed to assess your instincts.
An important part of VC recruitment is convincing your future colleagues you are thoughtful and attentive to the features of businesses that typically determine their ultimate success or failure. It’s worth emphasizing that being thoughtful is different from being right: there’s no universal set of standards by which to judge businesses. Case in point, Fred Wilson, even in retrospect, wouldn’t have invested in GroupOn or Pandora. Yet, his investment track record in recent years has been pretty spectacular: Zynga, Twitter, Etsy, and Tumblr are all well on their way to being great businesses. There are many perspectives which can lead to profitable venture investment strategies, so, focus on carefully thinking through the rationale behind your evaluative lens, rather than on trying to be right.
In short, my theory is that you must make generalizations. This is a tough pill to swallow. Learn to quickly place companies in assigned “buckets” as they’re evaluated. The case-by-case model is simply unworkable. Yes, you’ll be wrong sometimes. Hindsight and adjustment are part of the game.
There are many different types of buckets, I’m including the ones I find myself most frequently using in making evaluations. At risk of stating the obvious, many other VCs have significantly more experience and a more fine-tuned way of thinking about businesses than I do. The point is to provide context for thinking through your own beliefs about what makes a good investment opportunity. Form evaluations, try to justify them across the spectrum of companies you’re considering, and adjust your opinions and expectations as you’re proven wrong and right.
Teams: Evaluating team members is often cited as the most challenging and important part of venture investing. As John Doerr says, “Ideas are easy. Teams win.” Especially with early stage companies, where the barriers to entry are non-existent, a team that brings a competitive advantage is essential. Prior experience, technical talent and proprietary industry relationships are some examples of great qualities a team can bring to the table.
Market: Size matters. I’m only interested in businesses that attack multi-billion dollar revenue opportunities. How many potential customers are there? How much can you charge them? Multiply.
-Exogenous variables. Are there external risks which threaten the viability of a business model? For instance, consider the regulatory and industry risks faced by music companies.
-Composition. Is the market competitive or commoditized? What are the barriers to entry?
Technology: Complexity. Is the product hard to build? I like to consider early stage companies that have a spectacular team and/or are solving a very challenging technical problem. Otherwise, there’s no reason to think they’ll win over the next person who thinks of the idea or copies them.
-Website. If this is a consumer facing company, or one which makes sales online, a poorly constructed website implies inattentiveness to user needs or laziness.
Business Model: It must be transaction-oriented. Does the product involve a transaction which can eventually be monetized?
-Advertising. Very few technology businesses have scaled efficiently with an ad-based model. I usually ignore them unless they collect very high quality user-interest data which makes them uniquely capable of ad-targeting.
-Recurring revenue. Is the product priced on a subscription basis or as a perpetual license? Recurring revenue businesses have smoother growth curves, as they simply need to add more customers than they lose to experience temporal growth.
Think carefully about these and any other variables you might encounter during an investment due diligence process. I can almost guarantee that if you build up conviction around how you think about and evaluate businesses, you will put yourself far ahead of other applicants. More importantly, it will meaningfully accelerate your learning curve when you get the job.