How to Evaluate Your Startup Like a VC

How to Evaluate Your Startup Like a VC

Saturday, July 19, 2014

8:09 PM

When you build a startup, the most important thing to understand is how venture capital firms evaluate companies. That is the litmus test for any business. After all, they’re the pros. They’ve been doing this for decades. And they know what they’re doing better than you do, that’s for sure.

That’s not to say you can’t have a successful business without meeting their subjective criteria. Plenty of entrepreneurs were turned down by dozens of VCs and still went on to disrupt big markets and become wildly successful. Sometimes the idea that everyone says is crazy becomes the one-in-a-million like Google or Skype.

So how do VCs determine if startups are worth investing in? It’s no secret, but the way I see most entrepreneurs positioning their companies, you’d think it’s the formula for Coca-Cola or the specs for Apple’s next big iThing.

Granted, VCs are individuals with their own unique experience, perspective and thought process, so they don’t evaluate startups the same way. But having worked with dozens, maybe hundreds of VCs, strategic corporate investors, and investment bankers, I can tell you with reasonable certainty that there are six things you have to nail if you want to get any reasonable traction from professional investors:

The problem. What tough problem, market need, or customer pain point are you addressing? Why is it important to solve this particular problem? For example, Uber’s problem would be: “Getting a cab or a car to take you from point A to point B is a real pain. There should be an app for that.”

Tip: It’s a big help if you can find a way to present the problem so it resonates and hits home with potential investors. Make it personal for them.

The solution. What is your unique solution to the problem, how does it work, and how is it 10-times better than other solutions to the problem? Clearly define the concept and how you plan to demonstrate it, as well the products and services and how you plan to develop them. Does your solution require a unique ecosystem or is that already in place?

Tip: Don’t get too deep in the weeds. Remember, VCs are generalists that aren’t typically experts in your particular field.

The market. Who will the customers be and how big is the market opportunity? Provide the total available market, the segment you plan to service, and a timeline that shows how you plan to enter and capture that market, over time. Explain any assumptions you’ve made.

Tip: The market opportunity should be relatively big ($100 million to $1 billion or so), but not unrealistically so. It’s a fine line.

The competition. What current or future solutions, technologies, or companies may compete with yours in the market? How is yours differentiated; what’s its unique value proposition relative to the competition; why will your solution win? What intellectual property or other barriers to entry will keep you ahead of the competition?

Tip: The best-case scenario is that your solution is readily doable by you, but you’ll be putting up big barriers for others to follow. If not, you have to demonstrate how you plan to stay ahead of the pack that will converge on this hot opportunity.

The team. Who is your management team, what is their background and why are they uniquely qualified to run this venture and deliver the solution to market? Are there any significant holes and how do you plan to fill them? How do you plan to scale to meet the goals of your business plan?

Tip: This is the most important factor for many reasons: They’re going to be with you for the long haul, there will be tons of major hurdles, and if your concept doesn’t pan out, the capabilities of your team will determine whether you can effectively pivot or not.

The business. What is your business plan? Provide a multi-year income statement and capitalization plan that includes how much money you plan to raise, when you will need it and what will you use it for. What key assumptions are you basing your plan on?

Tip: It’s fine to have a spreadsheet as backup, but that’s way more detail than anybody’s going to want to see up front. Initially boil it down to two or three slides. Also, avoid “then a miracle occurs” steep hockey-stick growth curves. They’re generally not credible.

The kicker is you’ve got to somehow get all this on a one- or two-pager (text) and a 20-slide pitch. Still, it is a powerful exercise for three very important reasons:

First, this really is what it takes to turn a startup into a successful growth company.

Second, if you can get professional investors to write a term sheet and cut you a check, that’s validation of your concept, big-time.

And third, sooner or later, you’re going to have to answer all these questions … and sooner is way better than later.


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Most parts done

I’ve installed most parts of it done. (for the desktop that is)

What I still have to do:

  • Install and make the server working
  • Test it so that a web-server inside VBox should be accessed outside the chain, in the guest OS
  • If this is done, install the following:
    • Nexus Maven repository
    • PostgreSQL database
    • Adempiere Server
    • Apache Web server
    • Team City build server (or Hudson)
  • Make a backup of this installation so that when I screwed up later on, I can immediately put it up.

Installing Ubuntu on my server

In anticipation of a server for business purposes, I downloaded Ubuntu Desktop and Server 64 bit.  The desktop edition for general operating system overall (for my sanity as well as entertainment – see I cant live without hearing music.); the ubuntu server is purposely to be run under a VirtualBox chain.  Servers will be divided on to two parts, one is for dev-server (I am hosting Adempiere open source) and another two is for the real app-server clusters and load balancing.

Now after burning the 2 edition CD’s, I installed the desktop to no avail.  So I downloaded the 32 bit version and alas it installed.  This means that I cannot install the 64 bit version of the Ubuntu Server, but I have to download another 32 bit version of the server. Life sucks.  My processor is an Intel Core 2 Duo which I am sure it supports EM64T.  Well, if it doesnt, the Ubuntu Desktop 64 bit wouldn’t run a bit up to the “Install Ubuntu” graphical desktop part; however somewhere along the way, it almost always produces “Installation Crashed” for reasons I don’t know.

Now, I have installed desktop edition 32 bit. List that I still have to download and contain myself for now.

  • Download the Ubuntu Server 32 bit also.
  • Install VirtualBox
  • Install Java
  • Install Tomcat
  • and since I am a developer, it would do me a great deal of favor if I installed IntelliJ IDEA also.

While browsing along with the Entertainment section of Ubuntu, I found a great deal of free and fun softwares. Shit, open source really rocks!!! =)

Desktop (client) specs computer hardware

Here’s my mini-server specs:

For desktop client use:

  • Ordinary PC capable of Java applications
  • Cash drawer
  • POS-like structure
  • Barcode Scanner
  • Barcode Printer
  • Dot-Matrix receipt printer
  • Laser jet or Photo printer with CISS capability.

Server specs computer hardware

Here’s the desktop specs:

For buying:
Orient Transformer with 600W Yellow/Red/Gray        1,550.00

AMD Athlon II X3 400 3.0Ghz                            3,250.00

Emaxx AMD880HD3-Pro                                    2,700.00

4GB DDR3 1333 Emaxx (2-yr wty)                        2,100.00        8 GB
4GB DDR3 1333 Geil Single (2-yr wty)                2,350.00

HDD: (for data storage)
500GB Seagate 7200RPM 16MB (2-yr wty)                1,950.00
500GB Transcend Storejet with Anti-shock            3,650.00

Graphics: (for monitor)
Palit GF 9800GT 512MB 256Bit DDR3 Green Edition        3,600.00

A4Tech G7-630-5 2.4G Wireless Optical                  690.00

WiFi: (for internet access)
TP-Link TL-WN821N USB WiFi Adapter                    1,150.00        2 pcs

UPS: (for power outages; no server should be down)
1200VA Powergarde UPS with AVR                        3,400.00        1

Optical Drive: (for data backup and server installation)
Liteon ETAU108-32 8X External DVD-RW                2,150.00        1

Total:                                                31,240.00

Network cabling:
UTP Cable (per box)                                    1,250.00        1 box
RJ 45 Connector                                            3.00        20 pcs

Am I *TOOL* dependent?

One of my colleagues struck me by saying “you are tool dependent”.   From the very moment he said that to me, I agree deep within – although I never answer or loudly answer YES.  I know what he means by that and now I’m asking myself that very question.  In order to answer that question, lets define first what being tool dependent is?

  • Explores a lot of tools, recursively
  • Is lazy
  • Yet is ideal
  • The goal is to produce or optimize things with very little effort
  • Does not focus on the subject matter but instead focuses on the tools to accomplish the problem or the subject matter
  • Kills time for tool exploration
  • Plays alot with the tools
  • Spends time doing boilerplate codes
  • A tool slave – relies on the tools very much
  • Always buying time or always lacks time
  • Never get things done
  • Couldn’t get things done without the tools
  • Having a hard time controlling oneself
  • Does not have self-discipline
  • Have an attention deficit disorder
  • Easily persuaded by tools
  • Jack of all trades, master of none
  • Critical thinker
  • Creative thinker to the point of once a problem occurs, the solution instantaeneously pops out of the brain and then performs research about what tool accomplishes the problem instead of analyzing the problem first and then acting after.
  • An action man without thinking first
  • You overly submit oneself to that way
  • Has a lot of options because of the result of finding a lot of possible tools and solutions to solving a particular problem.
  • Always planning to escape being tool dependent but cannot
  • Tends to over-analyze things

From this definition alone, I would say I am.  Well, I just made up this definition from what I understand to be a tool dependent.

Upon reflecting, here I think are ways to escape from being a tool dependent person.

  • A determination to change
  • An everyday re-assessment of goals if it gets done
  • Focus and focus on solving the subject matter by not relying from the tools
  • Organize
  • Follow up
  • Focus on personal development – by not using those tools
  • Have a general sense of whats happening – have a birds eye view
  • Think first before acting
  • Always rely to oneself.  Don’t be dependent to things – and don’t escape the situation
  • Develop a sense of independence
  • Believe in your own competency
  • Gain personal mastery and self-control

Systematic way of tackling tool dependence.

  • Being dependent on things means holding on desperately to things to give life a meaning or direction.  In this case, to give you a desired solution to the problem you are tackling.
  1. Be willing to let go of the tools.  Begin by resenting those tools that can keep you back from all that you are capable of.
  2. Have the ability to self-initiate and lead oneself.
  3. Limit the tool selection to just 3, so that at least you have the options.
  4. Don’t over-analyze things for your pleasure.
  5. Practice, practice, practice.  From what I’ve heard, all it takes to acquire a habit is to perform it for two weeks consistently.  For example, if you are lazy to brush your teeth everyday – and you want to do something about it; train your mind and *do* it for two weeks and it becomes a habit.