Post 43: The Venture Capital 70/30 Rule

founders need to understand this fundamental rule

If you ask most VCs what they look for in making a venture investment, they will almost universally say that about 70% of their decision is about the CEO and the team, and 30% the venture concept. This is perhaps the opposite of what you might expect. But VCs recognize that great teams will be able to build great ventures, and mediocre teams will never build great ventures. And if the venture concept turns out not to work, the great team will possibly be able to pivot to discover an alternative venture concept.

So how do they learn about you and your team? It isn’t just looking at your backgrounds, your team chart, or your resume. The “70%” is also about how you give your venture presentation, with the VCs making instant, subconscious and conscious judgements about you. The “30%” is about VCs analyzing every aspect of your venture concept.

And so If you have been invited to give a presentation to a VC, congratulations!
You have already passed a major hurdle. Your venture is one of hundreds or thousands that has reached out to them, and they’ve chosen to see yours.

But remember that VCs don’t always take meetings to decide whether to invest. They may have meetings for multiple reasons: to learn more about the market or product or technology; or to learn about the potential solutions; or to learn about competitors in the market; or to do a favor for another VC; or to learn about competitors to their own portfolio companies. In the end, an individual VC partner might invest in one or two ventures a year. That’s right. One out of hundreds or thousands.

As a result, VCs have to spend very little time in sorting through venture opportunities. And they often rely on their instant, subconscious judgements to begin the sorting process.
As Malcolm Gladwell says in his book “Blink,” this part of our brain is called the “adaptive unconscious.” “Our brain is basically a giant computer that beyond our normal thought, quickly and quietly processes a lot of the data we need to do our tasks.” And much of the first few seconds or minutes of your presentation is providing the data that the VCs need in order to decide whether your venture is one they want to focus on.

Experts in the field depend deeply on their instincts, their pattern recognition, and their knowledge of the market. They have the “high ground” in having seen thousands of presentations of the market, the competitors, the business strategies, the teams, and more. And from their perspective, they are looking for something new that cannot only enter the market, but also disrupt it.

You might think that the VCs are primarily analyzing your venture pitch when you present. That is likely NOT their primary motivation. They already read your venture deck. Yes, they want to analyze all the elements of your concept, hear you give your presentation and dive deeper into the venture concept, but remember that 70% of their decision is about you and your team. They are intently analyzing you - often with millisecond subjective judgements:

They are analyzing whether you show a passionate commitment to your venture vision:
Do you easily convey your “North Star” vision of the future of your venture? Do you have passion and high energy? Do you show a depth of understanding of your customers, your competitive differentiation, your breakthrough, the technology, the market dynamics, and the benefits you provide? Do you demonstrate that you understand the risks as well as the opportunities? Do you avoid speaking about the risks or face them head on? Do you have a clear concept of how to mitigate the risks?

They are analyzing if you are a great leader, and have a powerful, cohesive team:
Are you a great story teller? Do you depend on your charts to give your presentation, or are you comfortable with no charts at all? Are you at ease? Are you stressed? Do you “muddle” your answers when they ask hard questions? Have you done your homework and know your competitors? Do you get flustered when you’re interrupted or maybe when a demo goes wrong? Are you articulate? Is each person’s role clearly understood and necessary? Does the team work well together, building on each other’s capabilities? Do some team members just sit there and not say anything? Do you and your co-founders speak over each other, or give different answers? Has your team worked with you in previous startups? Do each of you have the crucial skills in each of the high risk elements to execute a plan that has never been done before? Do you have the “grit” to get through the hard times?

They are analyzing whether you would be a great partner to them:
Do you realize that a great VC is not just a source of money, but they are a partner to you helping you build your venture? Do you like the VCs, and work well with them? Can you explain why you came to them? Do you know anything about them and what they’ve funded in the past? Do you know how to raise money? Do you appreciate their input and advice? Do you listen to them, or do you just talk about your venture or yourself? Do you respond to challenges with confusion or anger, or do you appreciate them? Do you show a desire to learn, or do you think you know everything?

I once invited a founder to come to a partner’s meeting to ask for a Pre-Seed investment in her venture. I had already let my partners know that I supported her. During the meeting they asked difficult questions about the venture, such as where certain elements would be manufactured, what might happen if a supply chain issue came up, who the competitors were, and so on. At some point, she was so upset by the questions that she literally got up out of her chair and said: “I don’t know why you’re challenging me with all these hard questions! I thought that this meeting was pro forma, and that you would all support me.” She then left the meeting.

She had no concept that these questions were indeed fair to be asked, and not only that, her reaction to them was also what was being evaluated. At that point, there was no hope. She would not get the investment then, nor ever in the future.

It is also important to ask yourself if you like the VCs. The last thing you want is to have an investor you don’t get along with.
In 2007, when we were asked to present our Siri venture to a high profile VC at a leading firm, we sat waiting in the meeting room. The partner showed up 20 minutes late. He came in while also talking on the phone. He didn’t apologize for being late, and just sat down and waived for us to start the presentation. After listening for a while, he went out again. We paused until he returned five minutes later. Again, no excuses were given. Then at the end of our presentation, he said, “I’m interested in your venture, but I think Siri should first be on a PC, rather than on an iPhone. If you agree, and change your plan, I’d be happy to take another meeting.” We all walked out of that meeting, and went outside. Out of earshot, we swore an oath to each other that we would never want to see that VC again, regardless if he offered to invest.

After these intuitive judgements, if the VCs are still interested, they will work on the “30%” of their decision process, and dive deep into the venture concept.
For this part of the analysis intuitive feelings are not at all adequate. When you give your presentation, VCs will want to learn about how you’ve achieved the ten tasks that founders need to accomplish as I describe in my post: “A proven model for creating breakthrough technology ventures.”

A full level of diligence can take days to weeks of effort. Every element of the venture has to be analyzed. But it is the initial snap judgements that are often the most crucial.

I hope you enjoy my posts and they give you valuable insights. If you do, please subscribe. They are always free. And please share your thoughts with me!

Your Dedicated Venture Coach,

Norman

Gladwell, Malcolm. Blink: The Power of Thinking Without Thinking. New York: Little, Brown and Company, 2005