The better VCs usually have fairly pointed questions while maintaining a fairly friendly exterior (many fail on one, if not both, of these metrics – though most tend to be friendly, despite the stereotype).  Our goal is really not to proceed lock-step through the basic mental checklist I mentioned earlier, it’s all about identifying the key issues and gaining comfort you’ve addressed those concerns.  Neophytes or amateurs (myself often included) will march through down this list, but it does show inexperience if they are asking questions with obvious answers.

For example:

• If you come to me saying mobile bowling lane booking – I’m asking about market size, not whether it is going to work (that’s assumed).
• If you come to me telling me about a insulin delivery device, I’m not worried about market size.  I’m probably worried about IP and approval, possibly go-to-market strategy.

Other major concerns that I see very often: scalability, crowded competitive/substitutes space, addressable market size, revenue/business model, long-term defensibility (an acceptable answer is “it’s not” rather than defending something that’s not).  Think hard about the top one or two gut issues investors will have with your idea and be prepared to NAIL them.  This is your best chance at success.

Furthermore, investors (possibly irrationally) love metrics:

1. Traction (uniques, page views, etc.)
2. Cost per acquisition  (relevant search term costs, conversion rates, etc.)
3. Customer’s lifetime value  (revenue per customer, churn rates, etc.)
4. Engagement metrics  (number of returns, social sharing or virality coefficient)

If you don’t know yours – get on it!

Typical Old & Young Mistakes; demographically specific hints

(I admit full guilt of stereotyping, bias, etc. I KNOW that these are gross generalizations with many exceptions, I hope they are helpful, not offensive)

Newbie, YOUNGER entrepreneurs:  You tell us nothing about team relevance.  Often times that is because it’s a bit of a stretch, but we’d love your best attempt.  We’ll expect you are going to put in the all-nighters, survive on a shoestring budget, live and breath your space, and hustle.  We want know how you are positioning yourself to beat others and are passionate about your space, even though you don’t have years of expertise to back it up.

You usually haven’t prepared enough – market dynamics, competitor deep dive (not just their pricing, but their rough costs and future strategy as best you can guess).  You tend to think like the end-user which is great, but usually you are the target of your proposed solution, make sure there is a broader appeal.  Validate that the business is attractive given the economics and external dynamics.

Newbie, OLDER entrepreneurs:  You spend too long explaining your background – your path through life, how much you know about the space, etc.  We know (and expect) you’ve been around the block, we want to hear the 1-minute, high-level summary.  If we want to know more, we’ll ask, believe me.  One unique item you should hint at (maybe not explicitly say): what is your risk profile given your personal responsibilities (family, mortgage, etc.)?

You also tend to come prepared in the wrong ways: decks too long (esp. over 20 pages!) and overly specific (how do you know the IRR or that your 4^th year revenue will be $63.7M).  I’d encourage you to think more from the perspective of the customer (how and why they’ll use it) and nail that – as you come from a generation focused on pushing products.  Read Steven Blank’s stuff.

REPEAT entrepreneurs: Why are you reading my blog?  Pitch me your next business, you know we love ya!  But seriously, don’t ride on your laurels – we know you understand the risks and emotional rollercoaster that is part of the course.  Highlight the biggest one or two mistakes you made, prove to us you can be self-critical and you are just as hungry this time around.

Many will claim to be ‘seasoned/repeat entrepreneurs’ that probably shouldn’t – be honest about your past business.  People claiming to be ‘successful’ entrepreneurs that are quickly revealed to have sold a piece of software they hacked together on the side of their day job for $10K in a fire sale just as you were shutting it down is interesting & relevant, but doesn’t quiet count and a successful exit or real start-up pursuit if you were holding down your normal job.  If we like what your building, we are going to do research on you, so all will be revealed…

Likewise having failures, of course, count positively (as long as you havent had a string of 10) – we’ll want to hear about these t0o.

Albeit, I am a neophyte to the investing scene, but have quickly learned that investors ask fairly repetitive questions to address obvious concerns.  In turn, the answers received start sounding similar as well.  A couple questions that startups frequently struggle with (or, more importantly, think they have good answers to, but usually aren’t compelling):

(there aren’t necessarily wrong or right answers, but worse and better answers – of course these can shift depending on the industry, business, etc.)

Question 1: Addressable Market Size?  

What’s being asked:  If you sold your product to everyone in your target market (at the proposed prices), what would your annual revenue be?

Key: It does not have to be exact – order of magnitude is almost close enough.

Worse answers:

• “I don’t know”  –  do your research!  We expect you to be close to an expert in your space
• # people, # companies, # transactions, etc. in the space  –  these are metrics that help build to an addressable market size, not the final answer
• Industry spending numbers  –  “$200B spent on enterprise IT solutions”…these numbers are easy to find, and way to broad.  Define exactly what you do and calculate only that part. 
• “It’s huge, definitely over a Billion”  –  yes, it’s well published that VCs are seeking companies in $xB dollar markets, but unjustified, approximate numbers are a sign that you don’t know the space (see #1)
• “$2.37Trillion dollars”  – Do a sanity check, if your number is larger than the GDP of most industrialized nations, Houston, we have a problem
• “10M”–  hinted at before, if your addressable market is really this small, then it is probably not a relevant venture opportunity unless it is growing at over 1000% per year

Better answers:

• “We’re addressing a ~$2.5B market, let me quickly take you through the math and share my (multiple, reputable) sources that support this estimate”
• “There are three incumbents in this exact space, and their aggregate revenue is around $5B”

Question 2: Sustainable competitive advantage?

What’s being asked:  How do you un-level the playing field, for the next ~3-5 years?

Key: it is a question about today – what are you holding that is special

Worse answers:

• First mover  –  a quick copier often can get more things right and learn from your mistakes, little advantage here except in very specific industries cases
• Network effect & traction  –  besides the fact these are often unsustainable, you can’t cite things that you don’t currently have.  “We will have a lot of users and they won’t want to switch” is not an advantage until you get those users.  Don’t confuse switching costs with competitive advantages.
• Software IP  –  possibly a controversial statement, but generally considered not sustainable, as most software patents are fairly easy to work around

Better answers:

• Vital, exclusive partnerships with the major customers/suppliers/partners that constitute a significant % of the space
• Access to proprietary information/data that others won’t be able to gain
• Hard to replicate technology at the core of the business
• An incredibly difficult problem that your team is uniquely qualified to solve (you have guy that built the only working quantum computer)

Question 3: Competition?

What’s being asked:  Who will fight you for anything you need to transact business

Key: Don’t focus on today but over the next 3-5 years, especially once you grow to a decent size.  Other startups at the same and/or earlier stage as yours should be mentioned, but not usually our chief concern.

Worse answers:

• We don’t have any  –  Most probably wrong, sure you know the space?  Besides, no competition might also indicate that this is not an interesting or profitable space.  Don’t forget what folks are doing today to address the need.
• “(insert large, existing player) won’t move into this space because they are focused on their core business”  –  might be true, but thousands of entrepreneurs said that about Google and social and now local…  These players are not dumb and capitalists – they’ll go after where the money is, sure some through acquisitions, but usually a small number for a given space.  What happens when you get some traction and show this is a great space?

Better answers:

• “Let me walk you through the players in this space that have me most concerned and tell you how we stack up on these key dimensions.”
• “Given the looming threat of (x big player) entering, here is our strategy to continue to stay 3 steps ahead”

There has been a lot of debate on whether an MBA makes sense for aspiring entrepreneurs.  The general buzz on the Internet is that it makes no sense to get an MBA by pointing to the cost, what you learn (or don’t), the opportunity cost of the 2 years, etc.  I had many similar doubts upon entering my MBA as well.

Honestly, most of these seem valid.  However, I think a good deal of the real benefit is either unknown by those that did not attend or ignored.  Does an MBA degree really add any value?  It all lies in leverage of the right opportunities.  Even going through the same program, same core classes, you’d be surprised how different an experience two MBAs have. If there was one thing an MBA provides, it is rich and unique opportunities for those with little relevant background in a field.  How else could you fly to Brazil, meet with the CEOs of the top 5 companies in a couple days or go to Silicon Valley and get time with 10 of the top VC firms over a weekend without any background or individual connections.

Beyond that, I’d ask for a little more rigor around these claims, especially with regards to MBAs being inherently risk adverse (purely by attending).  Look at the rate of started companies from the top undergrads/high schools (whatever stage of education you’d vouch for) and compare that to the rate of businesses started after an MBA program.  My gut GUESS would be that Stanford GSB, HBS, Wharton, MIT Sloan, Haas produce more founders per graduate than almost any other programs (baring say MS Engineering at Stanford).

With the advent of sub-communities in the various schools (e.g. Startup Tribe at HBS or Founders’ Club at Wharton), students are focusing on actually building things rather than generating more ideas they leave sitting in little black books (self jab).

To say the least, I see numerous companies started by my classmates and am proud to know 10 students that are dropping out after a summer where they saw significant traction or validation on their projects.   The broader start-up community applauds this as sticking it to the B-schools and I see it completely opposite.  I applaud their departures because they came to school to figure out their next move, became impassioned by an idea, leveraged the resources at hand (alumni, classmates, research for classes) to get validation, test the market, raise funds, get into accelerator programs, etc. (most of which they didn’t even know existed or how to access before they come to school).  I admire their departures but see them as a testament to the value of the very MBA they are leaving.

To departing MBAs – Congrats guys, go kill it!

To other MBAs – build stuff, leverage your time at school make actual progress

To non-MBA haters – stick to critiquing what you know and don’t dismiss MBAs off-hand, they tend to be some of the scrappiest people you could hire (just check their egos, unfortunately a few have given the rest of us bad names)

(aka: I am a hypocrite) 

I’ve been lucky enough to work at Genacast Ventures as the right hand of rock-star Gil Beyda (founder Real Media, Tacoda, etc.).  Turned down some awesome early-stage start-up opportunities to take the role, and will always wonder, but am very happy with the choice.  Only 2.5 weeks in, happy to share some surprises and advice:

In short, I’ve loved it – BUT probably don’t recommend pursing VC immediately to most others (esp. newly-minted MBAs).

For those looking to get a job in VC, I will repeat the advice I get from almost every VC I’ve talked with: [Why VC?  Don’t.  Go start a company, get some scars or (preferably) success stories and come back in 5-10 years.]

Sure, it’s hard to get a job in this small (and shrinking) industry, but that’s not a good reason not to try.  After only a short while on this side of the table, I see why this advice makes sense:

1)   MBAs, Undergrads, Consultants, etc. generally don’t have the depth of expertise or experience to quickly screen companies.  Unless you’ve started a couple companies, it takes a while to develop the right gut to not waste the partners’ time.  I am getting better, but still occasionally show deals to Gil that are fairly clear passes for our fund, just to make sure.  The best VCs are such because they can filter faster than anyone.

2)   Joining at this point in your career means you are (generally) on a non-partner track.  Meaning you’ll stick around for a couple years, maybe get a promotion, but end up having to go start a company or work as an operator at a portfolio company before you could be considered for further advancement.  Why not do that now?  Especially given the market conditions…

3)   Lack of carry + not the best compensation compared to other options make the opportunity cost high – you shouldn’t be in this for the money anyway.  If you are, go to banking or PE, even consulting over VC.

4)   The VC skillset doesn’t directly translate into an entrepreneur’s skillset, if you ever want to go that route.  It does help you screen your own ideas and make great contacts, but these are attainable if you are scrappy without a VC job.

So, why am I doing it?  I always have had a penchant for early-stage investing as you are potentially seeing the most innovative stuff (in reality, almost all are incremental improvements), are almost fully aligned with the founders, and can actually help a bit with feedback while they are still iterating.  That being said, the difficulty of finding these needles in haystacks without a metal detector is not to be understated.

I quickly realized after a few weeks that early-stage screening consists of sifting through more ‘non-ideal’ plans than you can imagine.  Clearly, nothing is perfect, but most aren’t close and consume the vast majority of your time, even once you learn the art of how to pass quickly.  For many this results in what I’ll call FILTER FATIGUE.

Later stage investors have the luxury that (even though all will claim to have the same problem) their predecessors have done some level of screening.  They see deals that an (at least somewhat savvy or rich) individual(s) vetted and believed could succeed.  Sure, there is still a fairly sharp funnel at each stage, but the mouth of the funnel deals with all the crazies.

What this all means: hustle & search broadly and filter as quickly as possible.  Even more than an entrepreneur, your job is to hit the street, network like crazy, develop a presence in the ecosystem, etc.  In Gil’s words: ‘the VC game is filled with a bunch of cowboys.’  We often pass each other on the Amtrak in and out of NYC, spending the vast majority of our time with entrepreneurs rather than discussing deals or working together.

I hope that sheds some light on what it is like to work at an early-stage VC fund and hopefully deters many…the few that are undaunted will have a tough enough road ahead.