What VC’s want

There was a romantic comedy released in 2000 called What Women Want. In the film, an ad exec gains the ability to hear the thoughts of women. Trust me, the film is not as cringe as it sounds.

The movie does pose an intriguing question though, what if you could read people's minds? Imagine being able to read the minds of your kids, your spouse, your boss! OK, on second thought, that is a terrible idea 😅

As I was fund raising for my startup many years ago though, I did wish I could read minds. It was just so confusing trying the decipher what VC's were telling me. Even when we answered all the questions and nailed every request, they just came back with more 🙄

Ultimately, I got wise to the game. The simply wanted to keep us hanging on in the hopes of receiving a check as long as possible. It was a waiting game and they had all the cards to play.

Fast forward a decade later, we entered the biggest bull market for startup investing ever seen. From 2018 to 2021, it was an endless supply of capital and VC's were literally throwing money at startups. The waiting game became a more like a mad rush for Christmas deals on Black Friday.

Then the flood of startup funding became a trickle in 2022. Now VC's are in control again, knowing that funding activity has slowed down significantly, competition for deals has leveled off, and startups are in a more desperate need.

This has led to a return to some of the more frustrating behaviors exhibited by VC's. While veterans of the startup world are used to this, many folks that are just starting out are having a tough time figuring out how to navigate the VC dance.

Luckily, we are a couple of those grizzled startup vets, here to help you decipher how VC’s think! Let’s begin with unpacking four of the most frustrating behaviors:

You send your pitch deck to a VC, but you get no answer

Did you upload your deck to the VC's website via their handy upload button? Guess what, hundreds of other startups did the same thing. Some startups get lucky and land a meeting, but chances are slim.

Does your deck go into a black hole never to be read? Nope, VC's review the deck, but the deck only gets a brief scan to weed out startup that are off-thesis (not aligned to a VC’s areas of investment). Your deck will get a second pass, but the bar is very high as startups get filtered for red flags and criteria such as founder-market fit, large enough market size, and potential to be a large exit.

Why do they do this? Most VC's operate very lean and review hundreds of decks a month to find the truly exceptional startups. While many will not inform you that they are passing, the better VC firms will give you a heads up and their reasons why.

Avoid getting weeded out before you even get your shot to pitch. Get a warm intro to a VC partner via your network and only then send along your deck.

VC reaches out proactively, but meeting is with an associate

Many startup founders do not understand how VC firms are set up. In most cases, there are three levels; General Partners (GP’s), Partners (or Principals), Associates. The founders of the firm are GP’s who lead all aspects of the firm. Partners are senior members of the firm leading most of the investments. Lastly, there are Associates, junior members of the firm that perform the investing grunt work like reviewing deals and due diligence.

Because of the volume of startups to evaluate and the limited bandwidth of GP’s and Partners, it is up to Associates to take first meetings with startups. Startup Twitterverse is rife with opinions that founders should avoid these meetings. However, that can be a huge mistake!

If you are getting contacted by a VC, that means out of the hundreds of startups they reviewed, they picked yours to dive deeper for investment. That is a good thing and an opportunity to demonstrate what makes your startup venture-backable. If you can convince the associate of your potential, that is the first step towards building support in the VC firm to back your startup.

Your VC contact seemed really engaged and now is ghosting you

The process of working with a VC involves a lot of back and forth and information gathering. It can seem like there is no stone left unturned as the VC goes through their due diligence process to ensure they are making a sound investment.

Then there are some VC’s that are not looking for deals. They are on a fishing expedition on behalf of an existing portfolio company or reviewing a handful of startups similar to yours with the intent of investing in one of them, just not yours.

This is bad behavior on the part of the VC and unfortunately quite common. It is hard to predict whether a VC’s interest is indeed genuine. This is why you must do your own due diligence to see if the VC has portfolio companies that are competitive to your own and if this behavior is an ongoing concern.

You have great conversations with a VC that go nowhere

Perhaps you have worked your way up to the Partners or even a GP. Every conversation seems valuable as they share ideas and suggestions for your startup. Maybe you even have regular check-in calls or hang out for lunch or after-work drinks from time to time.

When it comes to getting a definitive yes or no about investing in your startup though, you get a whole lot of pushback. “You are still too early” or “we want to see a bit more traction” or “the market is still somewhat unclear”.

VC’s seem allergic to saying “no” because time is on their side. Time allows them to derisk deals because the longer they wait, the more data they have to determine whether your startup makes the grade.

VC’s might be friendly, but they are not your friends. Keep it about business, avoid extra meetings, and prioritize VC’s that are ready to take your deal to investment committee (IC). If there is no willingness to present your startup in an IC review with the entire firm, then the VC is stringing you along.

There are plenty of other bad behavior that VC’s exhibit that we plan to revisit in a future edition. In the meantime, what are some of the most frustrating experiences you have had with VC’s?

Mark & Basil

So far in 2023, over 3,200 startups valued at $27.2 billion have wound down according to Pitchbook. If the past decade was the Cambrian explosion of startups, then 2023 was the equivalent of a giant meteor crashing into Earth and wiping out the dinosaurs.

Some of the more prominent examples of unicorns closing include:

• ZestMoney – Indian BNPL business raised $125 million

• Olive AI – AI-driven insurance company raised $832 million

• Convoy – Digital freight network startup raised $1.1 billion

• Zume – Pizza robot startup raised $446 million

• Veev – Prefab home builder raised $600 million

This does not include companies that went public such as WeWork and Zulily that are on the verge of collapsing. As we close out 2023, there are possibly many more ready to shut their doors, a complete reversal from the highs experienced only two years earlier.

Carta, while only having a small sliver of the startup ecosystem as customers, had an informative chart that showed how brutal the situation is for startup shutdowns, particularly in Q3 of 2023.

Even VC firms are starting to feel the burn, with the surprise collapse of Openview Venture Partners out of Boston closing recently. As many VC’s go out to raise another fund in 2024, it will be to a much cooler environment as many institutions reassess their appetite for rocky startup investments. Expect more VC’s that did not show worthwhile return to go into zombie mode having depleted their current funds and unable to raise new funds.

Where does this leave your startup?

• If you are planning to raise funds in 2024, make sure you working with VC’s that legitimately have capital to deploy. Quite a few VC’s will go zombie in 2024 but still take meetings.

• Be prepared for a crowded H1 of 2024 as many startups held off fund raising in a more muted 2023 environment. Be even more prepared and intentional about your fund-raising process.

• If you are in danger of running out of capital and without clear line of sight to product-market fit, start evaluating exit options now. Most investors will be more open to less desirable exits just to limit impact to their reporting metrics (namely DPI & IRR).

We made it to the end of 2023 (well nearly)!!! We published 32 editions of this newsletter, built a subscriber base of over 5,000 folks on email and LinkedIn, and had a ton of fun sharing insights from our adventures around the world. Thank you for being part of that journey 😊

In one last bit of travel for the year. Mark headed over to Vietnam to explore the startup ecosystem. He first traveled to Ho Chi Minh City (also known as Saigon) to attend several events include a Founders Meetup by Tech in Asia, AI Day 2023, and an event at Dreamplex with Iterative & CoderSchool.

Then he headed up north to Hanoi, the capital of Vietnam, to attend the launch of Tech After Dark, one of the top tech networking events in Saigon. Along the way, he had a chance to talk about AWS, share thoughts from his book Community-in-a-Box, and meet many awesome founders & investors!

It was awesome to see the energy and enthusiasm displayed by the startup community both in Hanoi and Saigon. Vietnam is one of the most exciting emerging startup ecosystems at the moment. With its deep pool of tech talent, growing network of skilled startup operators, and enjoyable way of life, we are certain to see many more unicorns emerge from the nation over this decade.