I had a chance over the last 3 weeks to talk to many colleagues and associates in the Venture industry. Most were smaller, seed funds, with the largest fund size at $35 Mn and the smallest at $8 Mn.
They have between them about 210 companies they have invested seed capital in, with the average check size being about $315K. Over 70% were in the Silicon Valley.
The most important insight I gathered from my discussions was that if an entrepreneur was not looking to raise a follow on round after raising a seed round from a Micro VC, they were likely to be a much smaller company and hence not interesting enough for the seed investors.
If you are going after a small market, or slow growth one, your chances of getting funded by a Micro VC were negligible.
Which makes sense, but I think most entrepreneurs I speak to have the incorrect perception that Micro VC’s or seed funds as those that invest in smaller opportunities.
That cannot be further from the truth.
Micro VC’s or seed funds write earlier stage, smaller checks, but they are looking for the large, unicorns, as well, only earlier.
The number one question then that all the seed investors had was about the market.
It was not a simple question about market size alone.
So I set out to ask them about all the questions they had about a “startup’s market” and have documented them below.
As an entrepreneur, you need to review as many of these questions, but dont expect to be asked all these questions. It is likely a subset of these that your investor will likely ask you. It serves you best to review all these questions though.
Some of them may be redundant, but the fact that you can get the same question asked multiple times in different ways indicates that your potential investors will want to triage and understand the market a lot better before they make the bet.
- Is the market clearly identifiable (e.g. are there users who are willing to pay)?
- What is the size of the market (bottom up and top down)?
- How fast is the market growing (current growth trends)?
- How quickly will the market grow (potential for growth)?
- By what methods will the startup be able to reach it (are there high costs to get capture the market)?
- Can the market be segmented (are there lower hanging fruits to be had)?
- What types of people (demographic profile of buyers) buy this product/service in this market?
- Does the product/service have appeal based on geography (is this a first world solution)?
- What do potential or existing customers like about curren products/services?
- How quickly are other products (competitive growth) in the market growing?
- What makes the product/service unique relative to others in the marketplace (is there a chance the startup can grow quicker)?
- Do we have expertise (knowledge, expertise, etc.) in this market to help?
- Do we have connections in this market so make a difference?
- What are current buyers paying for comparable products/services?
- What is required to succeed in this market?
- How many competitors will the startup be competing against?
- Are there big incumbents in this market?
- How quickly are the incumbents growing?
- Has there been innovation in this market over the last few years / decades?
- Can the market support another player?
- How do competitors reach the market?
- What does the competitive landscape look like?
- Can this company achieve more than their fair share of market?
- Is the industry growing in size?
- What are other current trends within the industry?
- Who are the existing market leaders within the industry, and why are they successful?
- What type of marketing strategies are prevalent (Is the cost of acquiring customers high) within the industry?
- Is the industry seasonal (e.g. more food is catered during holidays)?
- Are there regulations (e.g. Uber and local taxi medallions) that affect the industry?
- Is there customer loyalty (e.g. it is hard to unseat ADP from payroll) within the industry?
- Is the industry sensitive to economic fluctuations (e.g. Match.com decreases matching during recessions)?
- Are there technological changes happening (e.g. Obamacare and patient records) or required in the industry?
- What are the financial characteristics (average selling price of products, average inventory turn, etc) of the industry?
