This is from a great article on Medium, called 6 simple questions a venture capitalist should ask before making an investment decision.
I've taken the article and thought about what it means for which investors you should pitch.
A man called Par Jorgen Parson, who's invested in companies like Spotify, shared a bit of analysis he conducted into his own investment decisions and their success.
He found SIX questions hold the key to his success, and so I've turned this into the SIX questions an entrepreneur should ask before pitching an investor:
- Has she invested before in a company addressing this specific customer category?
eg, Consumer to Consumer, B2C, Prosumers, SMEs, Large Corporates, Government, Defense and similar.
- Has she invested before in a company addressing the same industry vertical?
eg, Online Media, Adtech, Consumer Fintech, E-commerce, Security Software are examples of industry verticals that are specific enough.
- Has she invested before in a company at this stage of development?
eg, Seed, A-round, B-round, C-round, bootstrapped mature company taking its first external capital.
- Has she invested before in this specific geography?
eg, Stockholm, Berlin, New York, rather than Nordics, Germany, East Coast.
- Has she invested in this Founder team or members of this Founder team before?
- Has she co-invested before with the other VCs in the deal?
Here's the interesting bit:
- as long as Parson said YES to 4 or 5 of the questions, it was a good investment.
- If he answered YES to less than four of the questions "I should not have done it"
- If I he answered YES to all six questions, it didn't improve his investment outcome. Instead it "dulled it to just below what I would have generated without considering the questions at all."
- Other questions that turned out to have zero correlation to outcome, eg, “Have I invested in this business model before?” or “Is this my typical round size?”
- If he had followed this rule from the start, he would have made a "staggering 50% improvement from an already decent performance base!"
- Note: sample size is just over 30 companies so this is scientific, just anecdotal.
- Note that investments in Parson's portfolio like Spotify, Avito, iZettle, Widespace and Pricerunner all fit this model.
Parson tries to explain all this:
- Minimise your unknown unknowns
- Don't just invest as you have before: "if you are always inside the box, how could you then realistically think outside of it?"
- "if you want to take a very high strategic and calculated risk in one dimension — like building your success on a new emerging model or distribution platform (think Google Adsense in 2003, Facebook in 2005 or Appstore in 2008) — then you may want to minimize risks in other dimensions. Outsize returns often come as a result of capturing such seismic shifts at the right time."
Final point from Parson: he says the key denominator of success is "entrepreneurial team quality and true grit. All other factors are, in my experience, deal specific".
What this means: if you're approaching an investor, quality her/him by asking yourself and them these 6 questions. You'll save her/him and you a lot of wasted time and effort.