Guest Post : What do VCs look for?

This is a guest post by James Chan, Investment Manager at Neoteny Labs.  James will be in Jakarta from August 13th - 16th  11th - 15th, and would like to meet people and get to know the startup community.  Neoteny Labs is a hybrid incubator that combines early-stage venture capital with hands-on mentorship and incubation for its portfolio companies.  James works closely with General Partner Joichi Ito on the fund and its portfolio companies, and is based in Singapore.

Since this is my first visit to Jakarta, I thought I'd introduce myself to the investor and entrepreneur community by way of a blog post.  It is an adaptation of one of my previous blog posts.  I hope you'll enjoy it, and I looks forward to meeting each and every one of you in Jakarta soon.

What do VCs look for?

It is a question that has probably crossed the minds of many entrepreneurs who seek institutional funding.  I've never built a startup before, much less raise angel or venture financing, and most likely lack the legitimacy to field my own answers to the question. I would like to think that my response is an aggregation of the collective wisdom of the coolest and smartest people that I've had the fortune to work with so far.  I would also caveat that these points that are most applicable to early-stage deals.

The question begets two further questions; (1) What do VCs look for, for themselves? (2) What do VCs look for, from companies?

What do VCs look for, for themselves?

To VCs, apart from the obvious carried interest, nothing can be more important than earning street credibility with entrepreneurs and other investors. It is essential for investors to be straight-up and open when making deals.  Nothing destroys investors' street cred with entrepreneurs faster than those who turn around and ask entrepreneurs for directors' fees, or a placement fee to help them fill the rest of the round.  Investors who pay it forward, and readily roll up their sleeves and get their hands dirty helping startups are much more respected by entrepreneurs than investors who only sit on boards and ask tons of questions while providing little or no answers.  In the end, investors who have excellent street cred and are well-liked by everyone will most likely be the ones that get "invited to the party" when a Google, Facebook or Twitter happens once in a long while.

Equally important is probably the need for investors to also enjoy the journey and have a delightful working experience with the teams they fund. Much of it plays into what VCs look for from deals that they evaluate, so I'll leave that discussion until the next section.

What do VCs look for, from companies?

The obvious answer?  Wildly profitable exits for the fund, which in turn translates into solid returns for their investors.  For the most part, the quality of the startup team probably has the largest role to play in investment decisions. They obviously need to be capable.  Potential is nice, but not practical in the bigger scheme of things. Every startup is in the race against their competitor(s) to the finish line, and potential isn't something that will be afforded the luxury of time to blossom.  The team needs to demonstrate a strong grasp of the issues they face, and the hurdles they are up against.  Pragmatism, humility, integrity and willingness to listen while dreaming big are highly sought after traits that investors would love to have in the entrepreneurs that they back.

The companies should also be eyeing large markets and wide demographics, while picking a defendable niche to start with and devising a solid distribution plan.  The product or service should also have the potential for exponential usage growth - virality, stickiness and cheap/easy distribution are naturally desired.  The team should be able to clearly explain to investors what sort of unfair advantage it has over comparables and/or existing category leaders.

Success is in the Eye of the Beholder

Open standards, agile methodologies and development frameworks like Ruby on Rails and Python are enabling entrepreneurs to bootstrap for longer and achieve more with less.  At the end of the day, success doesn't have to be singly focused on the entrepreneur giving crazy returns to their investors. Few will have the knack or the luck to become top dog.  It is far more important for entrepreneurs to fail elegantly and fail fast.

To the entrepreneurs around the world who continue to toil endlessly for that pot of gold at the end of the rainbow, there are probably few things as awesome as earning the trust and respect of investors who choose to stick with them and invest in them across ventures, even if they have never returned a single cent to their investors' pockets.

To all the amazing entrepreneurs that I know and have yet to know, love and respect. Entrepreneurship FTW!