In spirit of my adventure to the Kentucky Derby last weekend, I’m going to write about what investors look for using an analogy I commonly bring up when an entrepreneur asks me what venture capitalists look for when making investment decisions – the horse racing analogy.
There are three key things investors look at – the product, the team, and the market. In other words – the horse, the jockey, and the race.
- If a horse is lame, obviously there isn’t a good chance of winning the race. If a product is lame, no one will buy it. It’s as simple as that. A stellar horse/product is eye-catching.
- A horse with great bloodlines is worth a lot more. Would you like to race Secretariat’s offspring? A product with strong IP compared to one without is a similar case.
- With the right jockey, a less impressive horse can race really well. The team is so important. What it comes down to is that people really matter…a lot! A great product and market are nice, but without a team executing toward a common vision, it’s just not as compelling.
- A jockey with a proven record of success gets more bets than the new gal or guy. A team with a track record of success starting and exiting companies is a sure way to get an investor closer to putting his/her money down.
- A jockey and a horse need to be the right fit. Both could be top athletes, but they may not work well together. For anyone who has been on a horse, you know when it just isn’t right. In a startup, a great team and a great product can work out really well. But if you have a talented team in the software industry and stick them with an awesome solar technology, it may not be the best fit.
- You want to be in a big race (market). Racing in the Kentucky Derby is a lot more interesting than some small local race. Sometimes you need to race in the small races to train for the Triple Crown, but if there’s no potential for the Triple Crown that’s not exciting.
- All three – the product, the team, and the market – are very important considerations for VCs when evaluating investment opportunities. Sometimes having 2 out of the 3 (e.g. a great product and great market) is not a deal breaker – a team can be built – especially when the company is early stage. Of course, the more complete the package, the more likely a VC is going to be interested!
Think about it…how would you place bets on a horse/jockey in a race? What do you look for? Previous success, pretty horse, cool name…these can all be compared to what a VC looks for in an investment opportunity – previous success, good looking product, catchy name…
When you’re evaluating opportunities to invest, or building your company and fundraising, think about whether or not you would bet on your horse and jockey in the race you’re running. If not, why not? What are you missing? If you can bet on yourself it’s a lot easier to convince a VC to bet on you.
Aka Venture Gal