Has anyone gone back and attempted to correlate these scores with ultimate success of the start-ups? Obviously there is the possibility (even probability) of self-fulfilling prophecy, but it would still be interesting to see if the scores have the potential for real predictive value, or are mere rationalization.
An Inside Look at how a VC Evaluates Startups
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Re: An Inside Look at how a VC Evaluates Startups
#12Has anyone gone back and attempted to correlate these scores with ultimate success of the start-ups? Obviously there is the possibility (even probability) of self-fulfilling prophecy, but it would still be interesting to see if the scores have the potential for real predictive value, or are mere rationalization.
Hi Vannevar,
This isn't an exact science and still has levels of subjectivity that make it less of a predictive tool and more of a simple litmus test for the fit between the startup and our investment focus. Just because we aren't a fit doesn't mean that a startup will not be successful. Many of the companies that score low will go on to do very well, and conversely there will be some high-scoring startups that don't live up to expectations.
Thanks for the comment.
Re: An Inside Look at how a VC Evaluates Startups
#13Has anyone gone back and attempted to correlate these scores with ultimate success of the start-ups? Obviously there is the possibility (even probability) of self-fulfilling prophecy, but it would still be interesting to see if the scores have the potential for real predictive value, or are mere rationalization.
Hi Vannevar, This isn't an exact science and still has levels of subjectivity that make it less of a predictive tool and more of a simple litmus test for the fit between the startup and our investment focus. Just because we aren't a fit doesn't mean that a startup will not be successful. Many of the companies that score low will go on to do very well, and conversely there will be some high-scoring startups that don't…
Forgive me, but that seems like an awfully cavalier attitude towards a process that you say you're putting a lot of time and effort into, and on which hinges such large investments and potentially large returns. Hasn't anyone there been curious whether the process actually works and how it could be improved?
Re: An Inside Look at how a VC Evaluates Startups
#14Something I have noticed about the VC community is that it is very much dominated by an insular mindset that only permits introductions by companies that are already connected in some way. Companies without these connections don't have a chance, regardless of idea, model, revenues, or earnings. This article does a good job of confirming this reality, from the initial introduction, to the diligence process. It's unfor…
No, it's not popularity contest. It's a Good Fella business. There's a Godfather sitting in his tower far and away and there's capos and lieutenants (his Good Fellas) who introduce their Good Fellas to Godfather who then invests some money if he likes that Fella. Who cares? Well, Godfathers take other peoples money and promise to invest that money in a best-best way, but they do not - they only invest in Good Fellas.
The reason they do it this way is because it is much easier to evaluate with confidence the people who come through their network. When sizable money is involved it is really the only way to invest. That's the same reason most people would not send a wire to a "long lost Nigerian relative" - the trust in the people on the other side of the table is low.
That's just part of the game. If you want investment from the top tier find a way to get on their radar through their referral network.
Of course the exception to the rule is to build insanely strong traction, revenue and visibility - via either bootstrapping or a handful of angels. Companies like Storm8, 99designs and a few others would fall into this category. The trouble though is that in many competitive markets the odds are against you reaching that position. If a competitor does raise significant resources and uses them to seize advantage in the marketplace your window of opportunity might close real quick.
That's why it is not necessarily a bad thing that it is Good Fella business. Just figure out how to navigate the system and use it to your advantage.
Be a pragmatist!
Re: An Inside Look at how a VC Evaluates Startups
#15Another thing for entrepreneurs to keep in mind is that VC's deal with bigger chunks of money these days. Angels have take on a lot of the early stage risk, so if the process outlined in this article seems overly cautious or insular it's because there's just no need for a VC firm to take on high risk, that should have already been done by FFF and/or angels.
Re: An Inside Look at how a VC Evaluates Startups
#16This is a pretty old school take on VC evaluation (maybe because he hasn't been a VC for very long?). Things that matter in today's world: 1. Team (how do they know you/what have you done) 2. Traction 3. Industry (to some degree, more as a blacklist) That's pretty much it for anything Series A and earlier. If you don't have a very high ranking in one or both of the first two categories, you will not be raising money.
I'd especially second #3, which is a popularity contest. In my experience (raised money twice before, doing it again now), it's basically impossible to raise from VCs/Angels who are not actively looking to invest in your industry already, no matter how good your business is.
Re: An Inside Look at how a VC Evaluates Startups
#17Something I have noticed about the VC community is that it is very much dominated by an insular mindset that only permits introductions by companies that are already connected in some way. Companies without these connections don't have a chance, regardless of idea, model, revenues, or earnings. This article does a good job of confirming this reality, from the initial introduction, to the diligence process. It's unfor…
This is an interesting perspective. "This article does a good job of confirming this reality, from the initial introduction, to the diligence process. It's unfortunate that capital allocation has turned into a popularity contest." I think you've arrived at the wrong conclusion, allow me to share an anecdote which illustrates why I think that. I came to Silicon Valley in the 80's and went to work for Intel. Intel at t…
I appreciate your detailed and involved response, and I appreciate your experienced perspective. That said, I'd like to make a few points.
First, I suspect you're assuming I'm new to the industry or that I am working on my first startup. In fact, I have done several, had a number of good exits, and am currently building another profitable, growing business in a large market. I am no stranger to building successful businesses, and I've put in my time on the web developer's equivalent to the 80186 project.
Second, my experience is that success in building businesses in no way translates to the kind of popularity or network that venture capitalists look for. Your claim that simply working in a startup gives one visibility to other entrepreneurs and those who funded them is not something I have seen. I have seen tons of contact with vendors, customers, strategic partners, etc, but never venture capitalists. They simply don't move in the same circles that bootstrapped companies move in.
Mind you, none of this is sour grapes. We're doing quite well growing on the basis of our own cash flow. We are happy to have never diluted ourselves and we are happy to have full control over the board and decision-making. But if we ever got to a point where we would like to accelerate our growth with outside capital, there is a no door open to us in the VC community, because we lack access to that network. Bank loans or traditional boutique private equity firms would be the likely targets of our financing efforts.
Anyway, I enjoyed your story of your time at Intel - it's great to see one of the "fathers" of early microprocessors here on HN. Thanks.
Re: An Inside Look at how a VC Evaluates Startups
#18Something I have noticed about the VC community is that it is very much dominated by an insular mindset that only permits introductions by companies that are already connected in some way. Companies without these connections don't have a chance, regardless of idea, model, revenues, or earnings. This article does a good job of confirming this reality, from the initial introduction, to the diligence process. It's unfor…
Actually, we read most of the pitches that come into AngelList (there's an up-front algorithmic filter for junk). There are other investors who browse the incoming firehose as well. If we think something is interesting / likely to be a good match, we email it to investors who follow those markets and locations. If the company gets interest, we broaden the send. Investors follow / take intros as they're interested. Keep in mind that 95%+ of businesses are not fundable by early-stage tech-focused Angels. AngelList is not a circular-reasoning walled garden. Most of the value that we bring investors is surfacing them deals outside of their social networks, and most of the value that we bring startups is finding them investors outside of their social networks. If we didn't do that, we would fail.
It's very much like a dating site. We can't let all of the guys contact all of the girls whenever and however they want. But matches are made all the same.