Explaining VC Part 4 – So, what are we looking for?
Thus far, we’ve looked at how the VC model works and what the investment process is. Now, we have to tackle the question that most entrepreneurs have of us, namely, “Just what is it you people are actually looking for?”
Unfortunately, I have no simple answer to this question. There are so many different factors that come into play when deciding to make a VC investment that it is impossible to generalize a rule. However, I can offer up a well-known framework for thinking: the combination of technology, market, and team.
As investors who look to put money into high-tech money with a time horizon of 5-7 years, our ideal company would have the following combination of traits:
- Technology /product– Obviously innovative, something that can lead the next generation, technology that has significant advantages over the competition, has the potential to be disruptive, and has strong IP protection.
- Market – I’ve mentioned this before, but we are looking for a product with significant market potential (theoretically in the billions), in a growing market, with proven success stories and exits.
- Team – A dedicated group of founders with passion, drive, and vision; people who have a deep understanding of the market they are operating in and have experience in similar ventures; a group of individuals who balance and complement each other.
In the real world, of course, you will find very few companies that fit the description above 100%. So, Generally speaking, you start looking for combinations. As a general rule of thumb it’s enough that a company has two out of the three components (technology, market, team) for it to start looking interesting.
Which two components are the most significant often depends on the fund you are talking to, and quite often the specific investment professional looking at your company.
As a general rule, Israeli VCs tend to emphasize team and technology. This comes as a result of Israel’s position in the world. As a small country with few national resources and a tiny local market, Israel’s biggest asset is its people and especially the Israeli talent for finding clever technical solutions to tough problems.
The fact that Israeli companies have traditionally excelled technologically more than anything else leads to a certain bias in that direction. However, over the last year I have seen more willingness by local VCs to fund companies whose strengths are less technological and more in their innovative business model and/or their target market. Giza’s investment in Koolanoo Group, which develops a Chinese social network, is one example but there have been numerous others. Internet companies have a tendency to fall into this category.
I said before that what counts is a combination of three factors. In reality, the team counts for more than the other two combined. A great team is always critical no matter if you are a technology or market play.
A great team, the thinking goes, will be able to adapt its technology or business model as market conditions change, so it doesn’t actually matter what the initial product is. And if the entrepreneur is good enough, a lot of funds have Entrepreneur-in-Residence (EIR) programs where they work together with the entrepreneur to build a company from scratch.
What makes a great team? Another difficult question. Ideally you should have one person who is very strong technologically, another who is strong on the business side and one person who can manage the operation. The team should also be able to work well together, both during the good times as well as the crisis points.
Next time: Tips for dealing with VCs
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