When I meet with entrepreneurs to discuss a potential investment, I often find myself asking a question:
Can I play a movie in my head about this company or this entrepreneur?
Who are the characters? What’s their story? Are they compelling? Is there a plot? Does it make sense? And, maybe most importantly, how do I see this movie ending — with the startup evolving into a great, big business delivering a highly-differentiated product to a big market? Or with a floundering business sputtering in an overly saturated market?
Frankly, the conclusion of the story is the component I care about most.
After all, we VCs exist to make money for our LPs. So, naturally, I must be able to envision how the companies we partner with will grow into big businesses with clear exit potential. If I can’t, then I can’t justify putting our investors’ money behind a story I don’t envision having a happy ending.
How Investors Decide if a Company is “Investable”
Most great movies have a handful of key components that make them compelling — a roster of incredible talent, outstanding production, a clear audience, a unique story, etc. Startup businesses are no different.
So, as I play this fictitious movie in my head during investment meetings, there are certain criteria I look for to qualify whether a business is investable:
Market Size
Pretty basic, but how many customers does the company have currently and how many others like them exist? If the market is large enough to support rapid growth, I’ll keep watching. If it isn’t, I’ll tune out.
Competitive Advantage
How unique is the product in the market and what does the competitive landscape look like? If I see a small market with a bunch of businesses fighting for the same customers, that’s not a good sign.
Economic Model
Is the business generating revenue? If not, how does it plan to? For growth stage VCs, no revenue is almost always an immediate deal breaker. But even if your business is generating revenue, VCs will also want to see that your economic model supports rapid growth.
Read: 6 Things Investors Look For In A Startup
Entrepreneurial Vision
Can the entrepreneur articulate where he or she wants the business to go? Does this person understand the market and its customers? Does the long-term plan make sense for an investor? Lack of vision or an inability to communicate the long-term strategy will almost immediately cause VCs to label a business “uninvestable.”
Exit Options
What’s the company’s long-term exit plans? Are there strategic acquirers in its market with white space that could be addressed by this solution? Is an IPO a possibility? The more exit options there are, the more VCs will be attracted to your story.
Deal Terms
Does the company’s revenue history and market size align with the deal size it’s seeking? If you walk into an investment meeting seeking $100 million for a business that hasn’t generated a dollar of revenue, you’ll get laughed out of the room. Facebook, Twitter, and Instagram are outliers, not models to follow — particularly in B2B SaaS.
Related: 15 Typical Questions That Investors Ask
Now, that’s not an exhaustive list and some early investment decisions require intuition. But by the end of a conversation with a founder I want to feel so compelled by the company’s potential that I can’t help but take the next step.
Looking at the Past to Predict the Future
Of course, making investment decisions will never be a perfect science. I’ve made investments in companies that didn’t work out, and I’ve turned companies away that grew into big businesses.
But the bottom line is that, in many circumstances, the best indicator of future success is previous results.
If, as an entrepreneur, you can show VCs that you’ve had success, developed a clear plan for the future, and identified a market large enough to support growth, the likelihood is that investors will listen. If, on the other hand, you have no real plan for the capital you receive, and your vision is built on false promises or unproven potential, you’ll likely walk out empty handed.
[Editor’s Note: A version of this post originally appeared on Inc.com)
