Key questions VCs ask when evaluating early stage startups
A compilation of what top tier investors look for in founders and ideas
Typically in early stage investing, you have a first meeting to evaluate a startup. In a world of 30 minute Calendly slots and “I’m closing my round next week”, I’ve found it increasingly important to optimize each and every touchpoint with a founder. One thing that’s been top of my mind is what questions to ask during that first meeting and to maximize information gathering and insights to decide whether to move onto further diligence.
I dug into the investment frameworks and philosophies of some of the best Silicon Valley investors and firms to find the answers. I wanted to know not only what questions investors asked founders, but also what they asked themselves after the meeting to make quality judgements at the earliest stages. Below is a compilation of some of my favorites.
What’s a question you always ask when meeting a founder for the first time? What’s important to you when you evaluate a startup?
On Heat-Seeking Missile Founders and Big Markets
Josh Kopelman at First Round Capital
“I’ve lately started to realize that our most successful companies are led by entrepreneurs who have a unique talent — they are heat seeking missiles.”
It doesn’t matter where the missile is aimed pre-launch. Successful entrepreneurs are constantly collecting data — and constantly looking for bigger and better targets, adjusting course if necessary. And when they find their target, they’re able to lock-onto it — regardless of how crowded the space becomes.
Choosing the right market is critical, because the market you choose determines the targets that are available for the heat-seeking missile to hit. At the end of the day, I’ve really come to believe that you can’t predict success based on where a missile is pointed pre-launch. Instead you have to assess the quality of the targeting system (the team) and the density/size of targets (the market). And hope that the missile you launch finds a true target — rather than a decoy…
https://redeye.firstround.com/2010/08/heat-seeking-missiles.html
On Assessing Leadership in Founders
Ron Conway @ SV Angel
Literally while you are talking to me in the first minute I am saying “Is this person a leader?” “Is this person rightful, focused, and obsessed by the product?” I am hoping — because usually the first question I ask is
“What inspired you to create this product?”
I’m hoping that it’s based on a personal problem that that founder had and this product is the solution to that personal problem. Then I am looking for communication skills, because if you are going to be a leader and hire a team, assuming your product is successful, you have to be a really good communicator and you have to be a born leader. Now some of that you may have to learn those traits of leadership but you better take charge and be able to be a leader.
https://startupclass.samaltman.com/courses/lec09/
On big ideas and founders that embrace experimentation
Roger Ehrenberg @ IA Ventures
“I have a rule: if I don’t think a company has the potential to grow into a billion-dollar+ value business, then I don’t engage.”
Our fundamental view at IA is that our pre-product/market fit, pre-Series A investments look a lot like experiments, and we bond well with founders who embrace this mind-set. When I find a team working on an idea I’m passionate about that I believe can achieve large scale, the first thing I do is to align on what we’re collectively trying to prove over the next 18–24 months. This involves asking the question:
“What does the future state of this company look like in order to raise a great Series A round from the just-right investor?”
We then work to unpack this into a set of hypotheses that must be tested over this time period, and to agree on the measures and metrics that would serve to validate (or invalidate) these hypotheses.
https://www.linkedin.com/pulse/my-approach-venture-investing-roger-ehrenberg/
On Founder Market Fit
Don Valentine from Sequoia
The “grandfather of Silicon Valley venture capital,” often asked founders one question to understand who they are and why they started their company:
“What matters?”
Internally at partner meetings, he’d slightly refine that and ask, “Will this company matter in 10 years?” I think one thing people forget about when pitching is tying all that together.
On Rapport as a Priority
Alfred Lin from Sequoia
“Tell me who your worst reference is and why.”
You can see how introspective and honest someone is by their response. If you can’t be transparent, we haven’t established the right level of trust yet to be business partners. During this time period when we can’t meet in person, references matter even more.
https://medium.com/south-park-commons/alfred-lins-fireside-chat-at-south-park-commons-60a2879ea19c
On Product Visionaries and “10x” companies
Aydin Senkit @ Felicis Ventures
He emphasized the importance of picking the best founders and he said he looks for “product visionaries”: founders who have an acute vision of a product or service that fulfills a very important need.
He spoke about the best founders having an “obsession with building something that is really really awesome” and that their vision is “infectious,” inspiring others to join their mission.
One interesting tip: He looks for companies that are “10x” in something — 10x cheaper, 10x faster, or 10x easier. He says this is a good indicator for the startup to be successful long-term.
On contrarian bets
Reid Hoffman @ Greylock
Hoffman advises founders to want to be contrarian and right.
“What do you know that [smart people] don’t know that makes it a potential contrarian and right bet?
On extraordinary people
Paul Graham @ Y Combinator
Succeeding in a startup is, in the most literal sense, extraordinary, so we’re looking for people able to do extraordinary things.
The most important question for deciding that is -
Please tell us in one or two sentences about something impressive that each founder has built or achieved.
As with all questions on the application, the best answers are the most specific.
https://www.ycombinator.com/howtoapply/
On Clarity of thought
Dalton Caldwell @ Y Combinator
“Can I have a productive conversation with this person?”
In successful interviews, the founders demonstrate a mastery of their own business. They can talk about what they’re working on. They know their own numbers, they know how many users they have, they know what their plans are, they know what their equity split is.
https://www.ycombinator.com/library/6t-how-to-apply-and-succeed-at-y-combinator
On A “Prepared Mind” to Identify Opportunity in Markets
Jim Swartz, co-founder of Accel VC
In 1983, Accel was founded by Arthur Patterson and Jim Swartz. The co-founders developed the firm’s “Prepared Mind” investment philosophy based on the Louis Pasteur quote
“Chance favors the prepared mind”, which requires “deep focus” and a disciplined and informed approach to investing.
It’s having a thesis-based approach to sort out what’s interesting…whether it’s the Slacks, or Clouderas, or Dropboxes, or InVisions. Accel spends a lot of time every quarter trying to define what major sectors are emerging that are going to be the disruptive, high-growth centers and invests along those theses.
On Identifying Anomalies and the Company Secret
Keith Rabois @ Founders Fund
“What is anomalous about this idea or company?”
With this question, Keith tries to understand whether there is true differentiation from the standard technology companies that currently exist. While spotting anomalies is a challenge for investors, Keith believes that unless you can see something special and very unusual, there’s no chance it is one of the top 100 companies of all time.
“What “secret” is the company predicated on?”
Keith defines a company secret as “a belief system about the world, that a certain company holds, that the rest of the world doesn’t really appreciate.” A company secret can be rejected or validated over time. Successful startups are often tasked to reinvent themselves because these secrets evolve and require innovation.
https://bowerycap.com/blog/insights/keith-rabois-three-key-questions-for-investors-to-consider
If you have additional suggestions/frameworks or are interested in discussing any of the above, please reach out at karine@slope.agency.
