Today I've found the question What metrics do VCs look for in early stage companies? on Quora. I decided to post my answer to the blog too. Through my experience is quite limited, I've become pretty familiar with the process during my five months in the VC fund. Maybe someone will find it interesting.
I'll talk about my experience, but it should be quite similar for every VC fund.
The process of reviewing early-stage companies at the fund I work for is quite structured.
First of all, we do some kind of screening trying to evaluate the company. At this stage, we just need to decide if we are generally interested in the idea, and the main thing to evaluate is the core idea of the project. The company's profile is not that important for now, as even if this particular start-up will fail to go through our reviewing process, there may be some interesting competitors.
If the idea looks interesting enough, the process continues and we look at the products the company has to offer, the current stage of development, team's profile. Talking about team, it is somehow important to have professionals with some experience in the field, but I would dare to say that it's not that much important as it's sometimes stated as there are tons of qualified people with great backgrounds who fail to deliver products, and sometimes a bunch of teenagers can create something truly amazing if they understand the needs of the market.
The it's time to take a closer look on the market, trying to evaluate the potential of the products, direct and indirect competitors, the current state of the market and if there is any interest for such products.
Usually if we go that deep we interact heavily with the founders in order to understand if they understand the market, have necessary skills to develop their ideas into successful products and if their vision of the future is similar to ours. We also prefer to have some kind of financial model to evaluate such metrics as IRR, CoC multiple, amount of cash need to be injected and so on. Also to have financial model is quite helpful as we can review in details the assumptions on which the model is based, see how they correllate with our understanding of the market and try different scenarios. But of course, all models are quite simple at this stage and aren't always accurate.
With $2-$5mm average deal size we rarely invest in companies without some kind of prototype or launched beta and some statistics to make forecasts but for seed stage there may be no financial models and such things so then this stage is skipped and all the process will concentrate on the ideas, team and product development.
The whole process takes from 2 to 5 months on average, and about 1 company out of 30 goes through it (this number should be hugely variable and depends on the market VC fund looks for, the focus and their channels to get information from).
