VC’s and startups: Looking for the right mating call

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Think of VCs  and startups like animals in a jungle who are looking for the right partner to mate. Just because two lions of opposite sex are roaming in the same area and come across each other, it does not lead to mating. The process of attraction only starts if they give each other the right mating signals.

Similarly investors respond to certain signals and for the process of attraction to start startups need to give those signals out.

Important signals:

  • Team: experience , domain expertise , passion, staying power, etc.
  • Market: potential size should be very large , your products/service /  business model should clearly indicate what problem you are solving and why will you get a significant share of the market.
  • Return on investment (only thing that matters in the end to an investor):  An investor needs to see strong possibility of a 10x plus exit. Which is a function of:

    • A large market
    • Capability of the team with its products / services to take the business to a scale , within 5-7 years. So that the investor can sell his shares @ 10 times the investment price
Apart from the signals investors are looking for, everything else is pretty much NOISE at this stage and should be minimized.

Once the investor sees the right signals, the process of attraction starts. He will come closer to you and your business. That’s when he will look for further details about products , domain, detailed financials etc. He will also spend efforts to learn more about the domain and may involve some domain experts.

He further validates the same thing:

  • Whats are the odds of getting 10-20 X Return on Investment in 5-7 years
  • Whats are the odds of getting 5-10 X Return on Investment in 5-7 years

Once he is reasonably convinced about the RoI.  Next stage for him is to look for all reasons to say NO.  He looks for things about the team / market / product / competition / legal issues – which may put the odds of RoI at a big risk.

  • And if he finds anything which can seriously risk the RoI – he will back out
  • If not, things move forward
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