Quora Answer: As a Venture Capitalist, How Do You Determine Which Businesses to Invest?

The following is my answer to a Quora question: “As a venture capitalist or representative of a firm, how do you determine which businesses to invest in, and which to pass on?” 

I used to work with investors, and I still represent some of them as an independent consultant.  I will start by saying that we do not scrutinise the business plan.  We ask people to submit a business plan because we want to see if they are able to put their thoughts in writing in some cohesive form.  We do not expect them to have a good business plan, because if they could write such a plan, they most likely did not need us.  What we look at, in the business plan, are four things: executive summary, financial projections, the team, and the exit strategy. 

The executive summary should, in not more than two paragraphs, tell us what the company is about, the market position, the product or service, and the unique selling point.  If they are not able to articulate that, we cannot see if there is a fit between what they want to do, and the funder’s mandate. 

We look at the numbers because they have to make sense.  People go into business hoping to make money, so we expect them to have, at least, crunched some numbers, and that includes their remuneration.  This allows us to have a cursory understanding of currency risk, and potential profitability. 

We look at the team because there needs to be people we are comfortable giving money to.  We want to see the group dynamics, who actually knows what to do, who is along for the ride, and the group dynamics.  People change when they suddenly have a lot of money thrown at them, and seldom for the better. 

Finally, we need to see if this people understand our role as funders, and where they intend to go from there?  Are they looking at a buy out?  Are they looking at going public?  Are they willing to consider some form of acquisition?  What if it fails?  When do they decide to close shop, and cut losses? 

If they pass this, we want to meet them.  This is the make or break, since first impressions matter.  We ask about their family to understand their relationship dynamics.  We ask about their hobbies, and prior experience.  We want to understand their commitment and passion.  Ultimately, people are chosen based on their values.  Business knowledge can be trained, and advisors and independent directors can be placed in the company.  But if they have the wrong values, they will be a waste of money that could have better benefited others. 

Funders expect that most of these companies will fail, but these losses can always be used for tax write-offs.  But every once in a while, even in the wreckage of a failed business, we encounter people of caliber, who are better because they failed, and they want talent.  They also acquire technology, contacts, market access and patents that can be used elsewhere.  There is money to be made even when the business fails.  We are looking for that as well.