Better Odds For VCs & Founders

1500 words, 7 minutes.

Fishing Through Ice, Bain News Service. c.1910.

This post is written from the perspective of a VC screening for success factors. In it, I drill deeper into successful operational characteristics. If you’re an entrepreneur or founder, you should give consideration to adopting some of the systems I talk about here. I’ll even suggest prioritising them over features and fixes to your product because getting imperfect product adopted by many is a better predictor of success than putting perfection in the hands of a few.

Usage: “Who do you think is interesting at the moment?”

Something every VC asks you within 30 seconds of meeting.

It’s an understandable question. Depending on their role within the VC firm, feeding a funnel with interesting companies probably takes up at least half of their time. Whether it’s informal coffee with founders or sitting in pitches, sourcing deals is a huge part of the work. During my time at Fidelity Ventures, I probably spent 60% of my day researching companies, meeting management teams, and talking to proxies who might point me in the direction of “interesting”.

Venture Capital is an imperfect market. The best early-stage and high-growth companies don’t always get to meet the best investors for their circumstance and vice versa. That’s why it’s important to cultivate relationships with “aggregators of interesting”. Like a spider at the centre of a web, it pays to receive signals of “interesting” down silken strands. Most of these aggregators are pretty down to earth;

• An accountant offering part-time CFO services to early-stage firms.
• A serviced office space manager.
• A University technology transfer team.
• A contract sales-appointment company.
• My former boss or company founder now mentoring companies and boards.

No glamour, no hype, no Chief Ninjas, no little leather satchels. These people get to see the early-stage and high-growth companies. Best of all, they know who is getting traction. Building relationships with these people is a system. It’s a system which increased my chances of catching that rarest of species, the interesting fly.

I’ll end the spider/fly analogy now as it goes downhill pretty quickly for the fly from this point onward.

The problem with “who’s interesting?” is that the answer has a short shelf life. Timing is everything. Is the company raising money? Is the valuation justified? Are the other investors amenable? How does the firm’s stage today fit with the VC’s profile? Even if all these things line-up, your definition of interesting isn’t going to be exactly the same as theirs. It costs nothing to ask, but the odds of a useful answer aren’t great. That’s why VC’s have filters they use for interesting. Filters like these;

The Boilerplate filter

• A large market, or anticipated large market.
• Which ideally could accommodate more than one winner.
• Lacking incumbents, or where incumbents are handicapped.
• Where better product beats a bigger provider.
• Led by a great management team.
• Who have a plan to build barriers to entry for the rest.
• …and where a disruptive newcomer may achieve an exit in a short timeframe (years not decades).

The Individual Deal Screen

Every firm has its own particular preferences based upon network, expertise, investment thesis and fund constraints. It might include stage, market sector, geography, business model, technology area, and deal size.

Enhancing The Deal Screen

Much has changed in the years since the dotcom crash. Our definition of “technology company” is broader than before. It encompasses almost any firm using technology to achieve rapid market entry, disruption, and growth in some defensible way. Given this, how can we update the screen for “interesting”? What additional characteristics besides the boilerplate should we look for? Looking back over the last decade, what systems have increased the chances of success for early stage and high growth companies? Here are my recommendations;

1. Companies with a network effect. It’s old but good. There are more opportunities now than ever for companies to employ a network effect. Today we have network-effects within-network effects reinforcing and reaffirming each other. All made possible by convergence on TCP/IP and the ubiquity of inexpensive and reliable Internet access. Thank Bob Khan and Vint Cerf. Thank my old boss Peter.

2. Companies with an offering which enhances many things. If you can bring enhancement to multiple other activities, products, services, experiences, then there’s an explosion in the number of opportunities where your product can be bought, tried-out, talked about or recommended to others. People are creatures of habit, if users repeat the action of using your product several times per day, in conjunction with many different tasks, then it will become hard-coded into their brain. Think collaboration. Think automation. Think any product where you can say “Everything is better when you [verb.]".

3. Companies with a social element. I mean social in the broadest sense of the word. You already know what I think of much of social media. However, the benefits of recruiting a free sales force are too tempting. Companies with a social aspect automatically increase the number of potential interactions and the opportunity to gather intelligence on users, competitors, partners, buyers, and roadmap. Companies who harness social interaction are automatically increasing their internal knowledge base. The opportunities for controlling users actions and thoughts are abundant.

4. Companies which align with a large movement or themes in the real world. I mean the world outside our bubble of technology people/firms/analysts/investors. Strategic Software is just one example. We are living in a period of huge change. From the nature of work to demographics, to international geopolitics, to the cashless society. You can tell if a company is aligned with big themes by looking at the front page of any mainstream news publication. How many of those stories could a spokesperson of the company comment on without too much of a stretch?

5. Companies which empower users to do things for themselves. These are interesting because doing something for yourself always beats relying on somebody else. People will accept a lot of compromises before they give-up on self-service. Remember when eBay was so unreliable it seemed to be down more than up? It didn’t hurt them because the alternative (telephoning or writing to a newspaper to place an ad) was infinitely more horrible.

6. Companies which enable a self-sustaining chain reaction between users. I include online marketplaces where buyers and sellers meet and build a history of transactions. Chain reactions harness the psychology of trust. Trust increases over time, bringing with it stickiness. It could be something as simple as users being able to share templates, modules, or integrations with each other. You provide the reactor vessel, the users provide the nuclear fuel, the chain reaction happens naturally and you harvest the heat.

7. Companies with products which are easy to try. In this category, I’d put almost everyone with a “freemium” business model. “Easy to try” is also a neat way to find customers which are a match for the subset of features and capabilities you currently support. Everyone can try, those for whom there is sufficient value can buy. I’ve worked with a few SIEM vendors, as consultant, customer, and investor. The Demo -> POC -> Purchase -> Implement -> Production -> Support process took years for large complex customers. The cost of sale was huge. From that point on “easy to try” became one of my favourite winning systems.

8. Companies able to grow without online advertising. Advertising is broken. There are plenty of articles about it. Ads are slow, distracting, poorly targeted, over-used, badly designed. I began blocking in 2003 when ads were killing my Powerbook. The laptop is long gone but every few years I turn off blocking to check the experience is still horrible. Half of 18-30-year-olds block ads. That number will only grow as browsers include ad-blockers. Couple this with the fact that the online advertising industry is beset by problems of inaccurate reporting, fraud, and bots. If you carry ads in your product you should know that users may never see them, if you advertise your own product online you should know that most clicks are worthless. In my view, it’s better not to rely on ads for either purpose. As for the publishing industry the sooner they realise per-article micro-payments are the answer the better.

Not every one of these eight systems will apply to every company, but I’d be surprised if none of them was worth adopting. Exceptions are products with deeply embedded software, semiconductor IP, CODECs, or fundamental innovations such as wireless technology.

On their own, these systems won’t make a company successful. However, for every one of them, the chances of success increase a little because they make it easier to find prospects, to convert them into customers, and to retain them in the long term. Because they constitute systems, not goals, they are the gift that keeps on giving. They work best when baked-in to your product from the start, but it’s never too late to add a winning system.

These systems are booster rockets and force multipliers. One or two even offer the promise of a sustainable strategic advantage.

Whether you are an investor or an entrepreneur, what could possibly be more interesting than that?