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The average venture capital firm screens 350 companies and makes only four investments in any given year. A recent study from the Journal of Financial Economics surveyed 885 institutional venture capitalists and 681 firms on how they make their investment decisions. The results showed that when selecting investments, VCs focus more on the management team than business-related characteristics like products or technology.
More specifically, the management team was mentioned most frequently both as an important factor (by 95 percent of VC firms) and as the most important factor (by 47 percent of VC firms). Business-related factors were also frequently mentioned as important, with business models at 83 percent, product at 74 percent, market at 68 percent and industry at 31 percent.
The business-related factors, however, were rated as most important by only 37 percent of firms. The company valuation was ranked as the fifth-most-important overall, but the third in importance for later-stage deals. The fit with the fund and the ability to add value were ranked as less important. Early-stage investors and information technology investors place relatively more weight on the team.
If you look at how the VCs ranked the qualities underlying the management team, it seems that ability is the most mentioned factor, with more than two-thirds of VCs claiming it is important. Industry experience is the second most-mentioned factor, with passion, performance persistence, entrepreneurial experience and teamwork filling out the ranking.
California VC firms are more likely to say passion is important than experience. Healthcare VCs, again, differ from other VCs in placing industry experience as by far the most important quality and ranking passion as substantially less important.
What are these abilities that the VC look for? In my forthcoming book, The Entrepreneur Journey: Strategic Blueprint for Market Domination, I break down the ability criteria by dividing the entrepreneur’s journey into eight stages that every entrepreneur needs to pass. Here they are.
In this stage the entrepreneur needs to come up with a real problem to solve that’s significant for the world and meaningful for him and his team, creating the drive and passion that will propel him throughout his journey. Two prerequisites for this are:
- Allowing inspiration in. The ability to be receptive to new ideas and then holding on to them. In this scenario the innovator is not so much the generator of an idea as the conduit that allows the idea to penetrate and to flourish.
- Tactical positioning. Deliberately placing yourself close to the source of innovation. This can be attending a lecture at a university, visiting a workplace in a specific field or reading a book. When we put ourselves in these surroundings, we are opening ourselves up to inspiration in the area that we’re interested in.
The entrepreneur needs to be able to express their idea to the world, whether it’s through the written word with documentation and pitches or verbally through pitches or public lectures, video content and so on. The more you invest in the so-called “soft” skills of writing, story-telling and drawing, the easier it will be to convey your idea to the world. Skills like public speaking or being able to present your vision and values to camera are of the utmost importance.
The ability to form a team, to finance and to lead it. For most entrepreneurs, this shift will be a big step — one that entails a complete change of mindset from focusing on their own thoughts and wishes about the world to focusing on the team. The key activity is configuring the team, or teams. This might be a team you’re building from scratch, where you have to get the balance of expertise and responsibility right, or you might already have a team or team of sorts around you whose roles may need to change. Whatever the starting point, getting the structure right is vital.
Together with the team, the ability to build the execution plan, to understand the market, to decide on a product and how to package it, to create a set of documents and assets that will keep the business together in a coherent form. Planning is not a neat, self-contained, linear part of the entrepreneur’s journey. Many times you’ll find that you have to call a halt, regroup, come at the problem from a different angle and formulate a fresh strategy.
The ability to execute and build the product or service. It’s important for the entrepreneur to identify the approach most appropriate for their innovation through analyzing all the relevant factors intrinsic to the product and the external landscape for which it is intended. Short cycles of activity, continuous learning and agility in the development process will help you to achieve a functioning product. Your product will still need to face rigorous testing and often regulatory inspection before it’s ready for market.
The ability to test the product to make sure it adheres to quality and safety regulations. If the development phase is all about how to build a system, the function phase is about checking that the system is working in the way it’s meant to before it goes to market. This involves testing, quality management, safety considerations and the regulatory landscape. From the first moon mission, to software quality and security, to drug trials and the testing of medical devices, few commercial activities are as critical, time-consuming and expensive as testing and maintaining quality.
The ability to choose the distribution channel, to market the product and to optimize and get it to the end customer. Choosing the right path, or bridge, to get there is vital — a move that demands a completely different mindset and skills. This is where the rubber meets the road and there are some big decisions to be made, such as which channels to use, what kind of technology you need and who you should be working with.
The ability to collect information from the client or customer and learn how to improve the product. Feedback is when the world responds. You need to be prepared for a variety of responses, negative and positive, from letters of appreciation and great reviews to harsh criticism.
By understanding the eight stages that every entrepreneur undergoes, you can locate where your own blind spots are and where you need to put more effort. The entrepreneur’s journey blueprint is also a tool for VCs to analyze and gain a clearer understanding and ability to score the team abilities in a more quantitative way.