First off, the misspelling of Editrs in title of my last blog was intentional. Hello people, irony. With that out of the way, let’s talk risk.
If you hang around enough unfunded entrepreneurs you’ll hear smug comments like: “VCs are a bunch of lemmings,” and “There is no venture in venture capital.” It’s true, good VCs do what good businessmen do—follow trends and reduce risk.
VCs are not gamblers; they make calculated risks with an eye toward ROI (Return on Investment). It is their job to eliminate as much risk from an investment as possible in order to maximize the total ROI of their portfolio of investments. The general philosophy is not so different than that of managing one’s own personal investments, though the tactical difference is vast. VCs analyze everything. Whether or not you need venture capital to start your business, it’s best to do whatever you can to minimize your risk factors.
Future blogs will dive into the specifics of various risk factors to which VCs pay close attention. Below I focus on the macro.
An idea is an idea is an idea. An idea + the experience to translate that idea into a business opportunity is something else entirely. See Sanjay Parekh’s blog: Skill versus Luck in Entrepreneurship and Venture Capital for relevant statistics that underscore why VCs care so much about your track record. If one of your founders doesn’t have relevant entrepreneurial experience, hire someone who does.
As I said, VCs analyze everything, and they want to see that you do as well. Know the market; know the technology, know your business model, and know competitive landscape. Research all sources available to you and meet with industry analysts. The more you can answer questions with data instead of theory, the better off you’ll be.
Working Code & IP
There’s nothing like a working product to show that you idea … well, works. It’s always helpful if that product has defensible intellectual property (IP), though I think for most start-ups IP is a bit of a red herring. See Guy Kawasaki’s great blog on the question of entrepreneurial defensibility.
Customers are a good thing; paying customers, even better; subscription customers, the best.
Your Pitch/Business Plan/Slide Deck
Every word of your pitch, every page of your business plan, and every slide of your deck should A) showcase opportunity, and B) reduce risk. Put yourself in the VC’s place: scrutinize each word/page/slide and ask yourself, “How does this data/statement/positioning/analysis reduce the investment risk?”
3. Risk Reduction
4. The Network Effect
5. Been There, Done That (serial entrepreneurialism)
6. The New New Thing
7. Emergence & Maslow
8. The Analogy of the Watch (moving parts)
9. A Clean Cap Table
10. Perseverance or Blinders
3. Genre Opportunities
4. Target Marketing
6. Creating you Brand
7. The First Review
8. The Network Effect
9. Amazon Ranking
10. The Book Tour