How VC’s Look at Startups and Founders

A Quick Guide to Startup Funding

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 a Top VC

The odds of being funded by Andreessen Horowitz are 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%).

The Odds of Succeeding for a Startup Funded by a Top VC

Andreessen goes on to explain that, from an aggregate perspective, the top VCs 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 that are funded by top VCs, 15 of those startups will generate nearly all of the economic return. The rest will either go to zero or limp along without generating much return.

Therefore, even the top VCs tank over half their deals. Thus, they have to be very careful and are somewhat paranoid about being wrong.

The Total Odds of Success are 1 in 2,000

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 2,000).

What Do VCs Look For in a Startup?

When a sponsor like Andreessen considers funding a startup, there are a few main things they look for.

The three qualities they look for in a startup are:

• Huge market
• Differentiating technology 
• Incredible people

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 matters.

What Does a Top VC Look For in a Founder?

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:

• Courage – not giving up in the face of adversity; determined to succeed; can learn from mistakes
• Genius – ideas, way of thinking; harder to force yourself to do/more intrinsic

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.  Having willpower and not stopping at any obstacle is essential.

What Makes a Good Pitch vs. a Bad Pitch?

Good pitches

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 the story has to be very succinct, logical, and compelling.

Bad pitches

A bad pitch essentially lacks the qualities of the good pitch list above.

Specifically, a bad pitch may have the following traits:

• Idea maze is not well explained (gets lost in the maze)
• Small market, ordinary technology, ordinary people
• Founder doesn’t stick to his/her position when challenged on it
• A “me too” strategy (e.g., it’s like Snapchat, for cats)

Helpful Resources for Startups and Founders

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:

• Private Company Valuation Guide
• DCF Modeling Techniques
• Financial Modeling Templates
• Excel Courses
• See all valuation resources