Monday, March 19, 2007

Godin's guide to VCs

Seth Godin has put up some excellent high level rules for navigating VCs.

I particularly liked rule #1:

* 1. Investors like to invest in categories they've already invested in. If your business is so new that it's never been tested before, or is in a category VCs hate, think twice.

I would put an additional 1a. or rule 2 right next to that. If you are ALSO presenting a team that is unknown to the VC and/or has not already developed the "Pay Pal" blockbuster in another or preferably related category, walk away. In other words, VCs generally want ALL their criteria matched (market, team, #1, execution track record, protection/differentiation, etc.), and they might take a random "flier" on something breakout with one criteria missing. What they won't do, at least in my experience, is move in two directions of risk at the same time (new market, new team.)

This notion of taking a pass on startups with risks in two dimensions is not a tremendous surprise but the real crux here is : how often is a new market/category being represented by a known team? I'd say not often. Hence, rule #1 becomes a double whammy of market and management team track record if you will.

For new market/category entrepeneurs, this doesn't mean that you have to form with the brother-in-law of your VC group, but it certainly put a stronger focus on team and any relevant track record in businesses /business models darn close to what you are pitching.

p.s. (But having a family relation doesn't hurt... In a truth-is-stranger-than-blogging moment, a couple of weeks ago, I came across a competitor's vertical-axis wind turbine technology startup that was funded by socially focused Calvert Funds. This startup looked quite primitive and less than wholly compelling from a technology or differentiation or execution standpoint... until someone told me that one of their founders had an uncle at Calvert... :)