How VC’s Look at Startups and Founders
Breaking down the odds...
Breaking down the odds...
Raising money from a Venture Capital (VC) firm is extremely challenging. The odds of receiving an equity check from Andreessen Horowitz is just 0.7% (see below), and the chances of your startup being successful after that are only 8%. Combined, that’s a 0.05% or 1 in 2000 success rate.
Image data source. Note: graph is not to scale.
So, how can you increase your odds of building a company that will succeed?
This guide highlights what the top venture capital firms look for in a business idea and in a founder.
The odds of being funded by Andreessen Horowitz is approximately 0.7%.
Marc Andreessen (founding partner of Venture Capital firm Andreessen Horowitz) recently provided an interesting breakdown of the odds of a startup receiving funding from his firm in an interview at Stanford Graduate Business School.
In the interview, Andreessen explains that there are approximately 4,000 startups a year that are seeking to raise venture capital funding.
Of the 4,000 startups looking for funding, they look at about 3,000 per year, mostly coming from inbound interest. That number breaks down to looking at approximately 12 opportunities per day (50 weeks per year, 5 days per week).
Of the 3,000 they screen, they look at 200 very seriously.
In the end, they invest in about 20 startups each year (0.7%).
Andreessen goes on to explain that, from an aggregate perspective, the top VC’s fund approximately 200 startups per year.
Since there are 4,000 companies looking for funding, that translates to odds of 5.0%.
Of the 200 per that are funded by top VC’s, 15 of those startups will generate nearly all of the economic return. The rest will either to go zero or limp along without generating much return.
Therefore, even top VC’s tank over half their deals, and thus they have to be so careful and are so paranoid about being wrong.
If the odds of being funded are 0.7%, and the odds of a funded company succeeding are 8%, the total odds of success are 0.05% (1 in 2000).
When a sponsor like Andreessen considers funding a startup there are a few main things they look for.
The 3 qualities they look for in a startup are:
These criteria are quite logical. If the market is too small, it doesn’t matter how great the product or service is, it just won’t have a big impact. If the technology is too similar to other competitors, then the odds of breaking away from the pack are low. Finally, without incredible people, neither of the other two criteria matter.
Of the above three criteria (market, technology, people) most venture capital firms will say the decision largely comes down to people, as opinions on markets and technology are extremely challenging to get right, and are not necessarily that relevant.
In terms of people, the two most important traits are:
Of those two traits, one can be learned (through conditioning), but the other cannot.
We are all born with a certain courage quotient, but that figure can be significantly enhanced through life experience, conditioning, and training.
Genius, on the other hand, is very hard to develop. Intelligence can be improved through reading, continuous learning, etc, but it may not enhance your chance of success.
That’s not to say genius is more important than courage – not at all. The will to power and not stopping at any obstacle is essential.
A good pitch, according to Andresseen, can walk you through the “idea maze” of how they got from their original concept to a commercial idea that will actually work. There is only a short window of time to present to an investment committee, so this story has to be very succinct, logical, and compelling.
In addition to the above, they also possess all the traits that a firm is looking for, including a huge market, differentiated technology, and outstanding people.
A bad pitch essentially lacks the qualities of good pitch list above.
Specifically, a bad pitch may have the following traits:
If you’re hoping to raise money from a top venture capital firm, then you’ve definitely got your work cut out for you! To help you prepare for your pitch we’ve got plenty of tools and resources to support you. Relevant resources include: