The 6 Ts VCs look at when making an investment
VCs look for a lot of things when looking at a potential investment but the main things can be boiled down to the 6 T’s.
Every VC looks at these same 6 items when evaluating an investment opportunity. It's your job as the CEO to convey this information to a potential investor in a compelling way.
A VC may weigh one item more than another, and the scale will differ from VC to VC, but they all look at these points. Granted, they will look at other items as well but I guarantee that every VC looks at these 6 points and in this approximate order.
This is the first "T" and it is primarily a gating item. Is your company in a sector that this VC is looking to invest in? Is what you do 10x better AND cheaper than anything in the market currently? What problem are you solving and how will your product change the lives of your customers?
Each investor has a focus. It's something they're comfortable with and believe that there is a growth opportunity for them. Maybe they've told their limited partners this is what they invest in. Maybe it's because they have a background in that area. Maybe it's because they believe this sector is hot.
Whatever it is, this is about what problem you solve and what special insight do you have to solve this problem.
But this is a check-the-box item. Investment decisions aren't made on this. This simply gets you in the door.
Ironically, this is what most founders are comfortable talking about and spend most of their time describing. But it is the least important point for an investor. Investment decisions are made on the other five points.
As an early-stage company, this is the most important point for an investor to determine if they're interested in investing. Who are you as a leader? Have you done this before? What gives you the special insight into this problem you're solving? What is the origin story for this company? Who else have you attracted to your team and can you attract others to join you? Can you be a leader? Can you manage my money effectively if I invested in you?
VCs have to believe you are the right team to get behind. You have a vision they can support, you have the leadership qualities necessary to make that vision a reality, and you have the ability to attract the right talent.
Convincing a potential investor that you have a good team and you're a good leader is not something you do by telling them or by showing your team pictures in a slide deck.
You do it by showing your passion, by showing you really and truly understand your customer and their problems, by showing that you really understand your business, how to go to market, how to grow, and how to change the world. You do this by telling your story in a compelling way, by capturing their imagination, by getting them to see your vision of what your company can do and could be.
Who have you convinced to buy your product? Do they love your product? Are they telling others about your product? How did they find you or how did you find them?
This is a really difficult point for early-stage companies. Often you need money to build and complete your product so you can get traction but you need traction to get money.
You HAVE to find a way around this dilemma. Go to market with a less-than-perfect product, find a partner that can take you to market, or give the product away for free to get people to use it.
It’s one thing to say you have a great idea that may attract customers someday. It’s another thing entirely to say that you are adding customers like crazy and the business is already taking off. Investors want to put money into speeding trains, not stalled ones!
Traction doesn't necessarily mean revenue. It can mean users, feedback, partners, it can be a "virtual pipeline" of people that say they will use it when it's built. You have to sell your beta customers, your partners, your former colleague who said they’d buy your product if you build it. You have to demonstrate you will grow quickly.
Think quality over quantity.
These early adopters are the ones who will most likely be your first ambassadors, bringing their friends along to try out your product or service.
You need to take the lead in choosing the key metrics that accurately and positively express, both quantitatively and graphically, that your startup has broken through the traction barrier. Don’t ask investors if you have traction — if you have to ask, you probably won’t like the answer.
Total Addressable Market or Market Size is the "so what" point. If you're not operating in a huge market opportunity so what if you have a great team and great traction? If you have a great team and great traction but a small market, the investor loses. If you have a mediocre team and adequate traction but have a huge market, the investor can still win.
VCs don’t want to invest unless it's a 10x+ return on their money; so you have to show that your market, which is clearly defined, is HUGE, but doesn’t sound stupid. They do not want to invest in a big fish in a little pond.
Sometimes you can get the market and everything right, but it's not the right time. “Why buy now” is the hardest question to answer in sales and investing. Why invest now when I can see how your company develops? Or see the next company that rolls through? Is the deal arriving at the optimal time and is this business model riding a macroeconomic or cultural wave?
The difference between success and failure sometimes has to do with hard work and tenacity, but far more often with the strategy of timing.
Bill Gross of Idealab concluded that timing accounted for 42% of the difference between success and failure in investing. This was the most critical element from his study, which also accounted for team, idea, business model, and funding.
This is also known as "moats." How will you create barriers to entry? How will you protect your IP? How will you out-execute everyone else?
It refers to a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.
In my opinion, this is the weakest of the 6 Ts but it is still an issue that many investors seriously factor into their decisions.
While the 6 T’s are common on every VC’s checklist, the one true thing about every VC is that they’re different than every other VC.
Some are focused on specific industries, growth rates, revenue amounts, user counts, traction, or any other metric they’ve decided to focus on. Given that the 6 Ts are common high-level things that VCs look for, what’s most important for you is to research and understand the VC you’re pitching, and know why it makes sense for you to talk to them.
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