Every venture capitalist has their own approach to evaluating opportunities. After reading this, you’ll know not only what we look at, but what we do all day.
Each time I analyze startups, I have a system–a series of specific questions that habitually run through my mind. When I first meet an entrepreneur, the only thing I look for are PROBLEMS. After running through potential problems, I then move into a deeper realm of questions. You can find the worksheet I use for later-stage analysis here.
But, for now, we’ll focus on PROBLEMS. How do you uncover problems? By asking the following questions:
P is for Pain: What pain is your company proposing to solve? And even more important, is that pain significant? Is it founded on an impermenent fad? Or, is this something that will be a pain forever?
R is for Resources and Constraints: What is preventing you from being profitable today? Why are you coming to us for capital, and is it for the right reasons? Some companies come to us and don’t know why. They hear from their friends, “Hey, if you have any idea, you’ll need some venture capital to make it happen.” That advice is flat out wrong. Please, if you haven’t done so already, read this post and you’ll know why 
O is for Objectives of the Organization: Many entrepreneurs hate structure. They hate “beauracracy” or the “corporate way of doing things.” Cool. Me too. But setting objectives for your company isn’t beaurocratic. It’s logical. If I ask you, “What are your objectives for the next three month,” I expect to hear a quick response outlining at least three objectives.
B is for Buyer Behavior: Are planning to launch a product to a content, apathetic or lethargic market? What are your buyer’s like? Are they active, collaborative, slow/fast adopters, resistent to change? It’s great if your product is fantastic; yet, if your planning on marketing it to an already content customer-base, you’re going to suffer.
L is for Legal Environment: Are you planning on doing something that is subject to lawsuit immediately ? The reason I ask this question is because, if indeed your startup operates with this threat, any legal action could literally kill your company. At such an embryonic stage, it’s necessary to take legal threats seriously. Companies operating in the music industry need to really address this metric.
E is for Economic Environment: Are you planning on selling a product in a market that is down? How does your startup propose to be profitable even when your consumer’s confidence is in the dumps?
M is for Marketing and Technology Skills: You need both. One without the other will hurt your company dramatically. If you have one, and not the other, either (i) everyone will know your product sucks, or (ii) nobody will know that your product is great. They go together like lamb and tunafish.
S is for Strengths/Weaknesses of Character: This is where references and due diligence comes into play. And it’s pretty fun. As VC’s we’re putting our career at risk with each decision. Before pulling the trigger on the investment we always ask ourselves, “Who do they know that I know?” After finding a connection, we truly try to uncover any character flaws or things that would qualify as “deal-killers.” If we do indeed find one, it will be the difference between yes and no.
If entrepreneurs pass the PROBLEM test, we move onto an even a deeper, more specific realm of questions.
And, that’s what we do all day
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