Is your startup VC-backable?

Turns out there's a lot of grey area around what is considered VC-backable so here is our perspective on it.
By
Luddy Graham
November 30, 2021

After countless decks reviews and conversations, we realised that there are still many founders missing key points when pitching to us. For founders, it’s a tiring process and a lot of grey area around what investors want to see.

In addition, we’ve found many first-time founders fail to grasp the critical distinctions between a "venture backable" company and a "small to medium-size business.”

So we’re here to help!

Real talk moment - Just being a founder who is passionate about a product, idea, or market does not necessarily mean your startup is a VC-backable one.

What is a VC-backable startup?

Typically, a venture backable startup is a company whose business model and technology have the potential to generate significantly outsized returns - often 100 times or more of the valuation of initial investment and a $1 billion-plus valuation. From a fund management standpoint, we as investors also have a fiduciary responsibility to ensure companies ‘return funds.’

It's also important to note that not all great companies are suitable for VC funding and just because capital is available, doesn’t mean your business actually needs it.

The best way to answer whether your startup is VC-backable is to understand it through the lens of an early-stage VC investor.  Here is our perspective on the following themes first-time founders seem to struggle with communicating:

Team Desirability

Emphasis on ‘team’ - more than one.

While VCs also back solo founders 🥀, two or three founding team members are highly desirable as they tend to be more efficient and faster to grow and scale a company.

The team you build is just as important as your company; if not, more in the early stages of your startup. Ideally, your founding team should have complementary skill sets, market experience, and connections. The cherry on top for us are teams who are slightly obsessed with the problem space they work in and know the gaps in their industry extremely well.

In our view, startups may shift, pivot and iterate their product offering, but a solid team can quickly adapt and continue to drive the company forward.

🚩  🚩 🚩 Outsourcing to development or app agencies -  Our short answer on this is, don't. The long answer is, maybe, as a short-term solution under some circumstances. Here are our extended thoughts on that topic.

Market & vision

Don't play small, think big & aim high!

Vision - Make it clear that you're the ones to solve the problem and inspire others with your mission and with conviction.

Market - Work back from the end goal in mind with this one. Inevitably a founder/VC relationship ends happily when you are successful in becoming the industry leader – this typically means at the end you either sell your company or go public. It's crucial to prove that the market you're going after is big enough and your business has the potential to become worth over $1 billion. In addition, it represents an untapped opportunity when it comes to the existing competition.

Here is a sample of questions to ask yourselves when thinking about your market.

  • Is this a big enough opportunity? As a general rule, can you impact a billion lives?
  • Is your product unique enough in a saturated market, and is it the right solution for the space?
  • Does the company have the potential to scale in larger markets?
  • Can the company generate $100m or more in annual sales with the current strategy? How easy is this to see (or not see)?
  • Are there network effects and a competitive moat that will ensure growth and market domination?
  • Is this the right team, and have the conviction that their tech will change the way people or businesses operate given all of the above? Does your team have a clear roadmap and view of what they need to do today to get the company through a startup's 0-1 phase?
  • Is your solution backed by solid research and intimate knowledge of the market, its trends, where competitors sit, and what the customer needs?

Essentially we want to know if the odds are in your favour. Whether it's based on research, go-to-market, business development, or technology, we want to make a bet on a company that has a clear advantage.

🚩  🚩 🚩 Wanting to sell your business within 5 years – We want to back founders that are doing their life’s work, something important and impactful! Not looking for a quick exit. While it is important from an investor perspective that you exit your business at some point, founders that plan to do this within 5 years are typically not the right mindset or attitude for us. It takes a long time to build a global leader. We’re in it for the long haul, are you?

Traction

We often get founders unclear on what is a substantial amount of traction to excite VCs.

Emphasis on traction typically varies from stage to stage, however as a general rule, early-stage investors would like to see positive indicators of market interest.

Here's our order of "interestingness" revisited from our 'What investors mean when they say 'too early' post:

  • Growth of paying customers or users (e.g. in marketplaces or social networks^)!
  • Pre-commitment to buy, e.g. downpayment or pre-order
  • Commitment to buy, e.g. signed MOU (with a dollar value on it…)
  • Willingness to use, e.g. waitlist
  • Validated problem area, e.g. 50+ customer interviews or expert insight into a problem and solution needed.

🚩  🚩 🚩 ‘I have lots of signups on a waitlist, all wanting to use our product when we launch’ – While all validation is good, some forms are better and waitlists are low of that list. For online businesses today there really are few excuses as to why you don't have test users or have launched an MVP. If you can launch, do it! Of course, there are nuances to this in some industries e.g. finance and health but 90% of founders are not in those industries so get out there and launch.

🎬 For a more detailed context around the themes above, here is a recording of the Getting Investor-Ready session we ran with The Monash Generator.

✨ If you’ve ticked all the VC-backable boxes - go ahead and Apply Here.✨

At Galileo, we're doing things differently. We understand there's a painful lack of alignment between early-stage investors and first-time founders. We’re here to help you decipher. For more content like this, we’d 💜 to hear from you - reach out.

About the Author
The Head of Platform at Galileo. Founder whisperer, smooth operator and community cultivator.
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