This morning Bill Bartee, one of the partners at Main Sequence (Mseq) gave me a intensive accelerated workshop to run through how a VC selects the ‘right’ company to invest in and the absolute vitalness of that 10X return.
One differentiating characteristic about Mseq, is that we are an early stage fund. This means that when making decisions, there’s a whole lot more feel and a whole lot less data analysis (because that data simply doesn’t exist).
Here’s a quick summary of what early stage VC’s look for:
This is one of the most important factors in the ‘early days’. Creating a start-up, that hits roadblock after roadblock. Feeling like you can be the next Mark Zuckerberg then feeling like you’ve gone crazy and things will never work out. Its tough and tempting to give up which means that a lot of the time “people make or break the company”.
GSD (get stuff done) gene — VC’s look for hustlers. The ones that talk less and have an impressive focus to just nail out the tasks they need done. Founders who sit in a room and make 350 calls that week to prove they have product-market-fit. Founders that work to hit and go beyond the sales goals for the month.
Would I work for them? This question addresses so many underlying criteria. Can they build a great team? Are they great leaders? Is there great culture and team synergy?
Problem solving. Problems are going to be the unwanted but constant companions throughout the startup’s entire lifecycle, but almost all-encompassing during the early stages. Founders need to be able to face those problems head-on, combat them well and jump onto solving the next. They need to be able to navigate their company out of the waves of problems that threaten to smother it.
Resilience. Well really none of it is easy. You’ll hear hundreds of no’s before you’ll ever hear a yes. There will be critics, disbelievers, failures and you’ve got to pick yourself up each time, shake of the dust and continue moving forwards.
Look at formula 409, it took them until the 409th try to develop “a grease-cutting, dirt-destroying, bacteria cutting cleaner”
The question Bill asks is “is it appendicitis?”
Is it an acute problem you have to deal with right now, or can it wait until later. VC’s want to see companies that are dealing with problems that exist high up there in the degrees of pain scale, that people are really willing to pay for to resolve.
It can’t just be ‘better’, the product must be 10X faster, 10X cheaper and 10X better.
Why? Here’s Bill’s example. You live in an apartment that costs $300 a week. The landlord across the road offers you a ‘better’ deal, you can rent an apartment exactly the same for $295. Well…who cares, I really can’t be bothered to put in all that effort to move just to save 5 bucks a week.
What’s the TAM (total adjustable market)? It needs to be really really big, a market that allows the startup to generate 50–100M in revenue per year. This isn’t negotiable, VC’s need to find companies like these in order to provide a return to investors better than other safer investment alternatives. The mathematics of it is explained here.
But then again, sometimes the TAM is hard to see. Before Uber was a household name you would think that the TAM would just be the people using taxis (so at best it could get to something as large as the taxi industry), but their product has actually expanded the TAM to much larger than that.
5. Unit Economics
How much can you earn per item you sell? Perhaps at the beginning you operate at a loss, but costs need to be rapidly pushed down and margins maximised, in order to create a sustainable and profitable company.
6. Business Model
There needs to be a well though out plan of how to make money because at the end of the day VC’s have an obligation to provide a financial return back to their investors.
And that reaches the end of quick tutoring session, generously provided by Bill.
An exciting adventure planned for the afternoon.
We visited CSIRO’s collaboration hub to see a startup that was building the next generation of ‘eyes’ for automated vehicles, using LiDAR technology.
And it was absolutely amazing, seeing a startup so different to the mature tech startup, Oneflare I was previously at.
The team had expanded at an incredible pace over the last year. They were leveraging those funds to recruit, prototype, design, build and find customers. The GSD (get-stuff-done) attitude permeated the air so strongly and it was really inspiring to see so much passion and belief in one place.