This short summary is based on many conversations with VC friends and acquaintances from US and Europe over the years.
And even though I've never raised funds for my own ventures (except family & friends), I keep getting these questions and keep seeing entrepreneurs who misunderstand the incentives and VCs' worldview and investment logic.
That said, I have helped a number of startups to get ready to raise funds, and I also helped build (and name) a VC fund called Nation1. Hence I'd like to believe that my perspective is diverse and relatively objective since I was sitting on both sides of the table.
When you want to impress the VC who's evaluating your pitch, look through their lens and think how to make your idea stand out in the investment evaluation checklist.
Here’s a high-level VC checklist for evaluating investments. It’s kinda generic and every VC will emphasize different parts, but most progressive VCs will look at your pitch through these questions exactly in this order.
Start with Real Customer Pain Point
- make sure that you establish real customer pain from the start;
- it's way too often that pitches look like "another app" solving already solved problem but with more beautiful icons or cheaper - nobody really cares about this (I'm sorry I had to say that);
Highlight Market Opportunity
- everyone wants to see a large addressable market that is growing;
- where there is not too much competition yet;
- and if you can find them, showcase trends favoring adoption;
Then Show the Team
- I still meet many founders who think the idea matters, but it doesn't (I'm sorry);
- VCs are all about execution, and for that, they want to see (ideally) visionary but also pragmatic founder;
- team with complementary skill sets will get you extra points together with industry experience and some common history (like you didn't meet your co-founder(s) yesterday in the bar - yeah, that happens);
- VCs will want to make sure you, as a founder, are coachable and adaptable; most people in Europe misunderstand this; it's not that you do what someone (even VC) tells you; it's that you listen when someone is talking about things you don't understand and you make your own judgement!
- Also, be ready for a discussion about values and culture and questions looking for alignment on this or lack thereof.
Now comes the Product
- you see, the product is not the star of the VC pitch story; it matters, but only when all other check-boxes are checked;
- with the product you will ideally want to show some early signs of product-market fit;
- you will want to explain how you will deliver 10x better solution; and before you ask - 2x is not good enough, 3x is not good enough, 2x cheaper does not matter for VC funding;
- you will want to show that your product is hard to replicate or copy, aka it's defensible and protectable, at least in the short run;
- and if there is any chance for potential network effects, you must show it in bold letters!
After that traction
- if you have it, at least at some sensible matric, show that hockey stick growth;
- or at least strong engagement metrics;
- very few teams can show numbers like low churn and high LTV early on, but if you can, obviously, you'd lead with them;
- explain a clear path to scale and any ideas on how to speed it up;
- and if you have any failed attempts on product-market fit or getting traction, please talk about them because it proves your agility to pivot, and VCs love that. Actually, everyone does love this - it's called resourcefulness!
A boring but necessary look at business economics
- don't dwell on it; nobody will believe your revenue projection anyway; it's all about showing that you understand your cost side. That's what matters to VCs at the early stages.
- if you can spice it with sensible numbers on unit economics and ideas on the path to profitability, please do it. Again, don't obsess over it. It's totally fine to say, "We know our cost side; we'll have to figure out the path to profits later."
- the one thing VCs love (because public markets seem to love it now) is the recurring revenue model. So I'd say make sure you describe options for how to have this type of business model - unless it's obvious because you're a SaaS founder :)
- and if you can showcase how you will leverage automation and AI/ML to grow faster or optimize unit-cost economics, please do so!
That's it for the list. Just a few casual comments from most recent discussions on some high-interest topics:
You should not pitch every VC you can find - it's called spam. There are clear signs VC focus - like preferred stages of investment, preferred industries, types of businesses, some VCs like to lead, some like to join lead investors they know, and no VC will invest in competing products.
Almost every respectable VC I know will tell you that the team and market opportunity are the top priority areas for investment evaluation. Now, how people evaluate these two in detail will obviously differ.
The team is critical because they are ultimately responsible for executing the startup's vision and adapting to challenges. No matter how promising the opportunity, a weak team will struggle to capitalize on it. Therefore, evaluating the founders' experience, chemistry, drive, and coachability is essential.
Market opportunity comes next. There needs to be sufficient market size, growth potential, and unmet customer demand for the startup's solution. VCs will tell you that even the best teams will flounder without a sizable addressable market, but in reality, they will not be able to deliver their 10x returns in small markets. Competition is secondary if the opportunity is compelling enough early on.
Product, traction, and economics do matter but are more temporal. It's proven fact that a determined and capable team can almost always achieve solid traction and unit economics, so most smart VCs will place less priority there in an initial assessment. Also, an MVP product can pivot and improve over time. But a multitrillion-dollar opportunity and driven, complementary founding team are hard to beat.
On employment of the team - I often get the question if it is necessary for the team to be employed in the startup when asking for VC investment. This is a very contentious question, and unfortunately, every VC will have a different answer.
From - no, it is not absolutely necessary for the startup team to be fully employed and working full-time on the company when seeking VC investment from me; to the absolute opposite.
I'd say that logically, the most important factor is seeing evidence of an outstanding founding team with the qualities and experience to drive success - regardless of their current employment status, but...
In the early stages when a startup is still developing an MVP, it's common for founding teams to have other jobs or commitments still. Some VCs will understand founders must pay their bills and may want to test concepts before fully diving in.
What matters most is assessing the capability, vision, drive, and potential of the founders based on their background and previous accomplishments.
There will almost always be a discussion about your plans and commitment to the startup once funded. Every VC will want to make sure that you will have the flexibility and willingness to fully engage once the term sheet is signed.
There's hope, as one VC has put it:
"I would absolutely consider providing seed capital without requiring they already quit their day jobs. Execution potential outweighs current employment status."
Differences in how US and European VCs look at things
This is short transcript of a call I had on the topic.
More emphasis on big vision and disruptive thinking over current dedication. Willingness to fund raw potential and promise over tangible traction. We care more about pedigree like elite degrees, name brand work experience but we have more appetite for risk and moving fast without thoroughly proven concepts.
It is always assumed founders will quickly devote themselves full-time once funded because why would they raise funds otherwise?
European Perspective is more conservative
I believe European VCs look for evidence of dedication and progress made to date more. They want to see tangible proof of concept and some initial traction and assess grit and perseverance through early bootstrap phase, maybe evaluate founders' tenacity to grind away at their idea while working.
They will seek absolute clarity on how founders' roles and time commitment will change post-funding if they're willing to consider non-fully committed founders as investment at all.
In summary, US VCs may emphasizer raw talent and disruptive thinking, while European VCs want to see founders' commitment and progress come through more in their track record so far. But these are broad stereotypes - in reality, every VC is different. The most effective investors will assess startup teams holistically based on their skills, mindset, market fit and progress made to date in light of their circumstances
You should not pitch every VC you can find - it's called spam