What VCs look for in early-stage tech startups
Luke Smith, an investor at early-stage venture capital firm Forward Partners, explains what VCs typically look for when investing at pre-Seed.
Raising funding at pre-Seed is entirely different to raising funding later in your business journey, mainly due to the fact that at that stage your revenues are either non-existent (as you’re pre-launch) or they’ll be small enough that they won’t be a significant factor in the investment decision.
This means that the strength of the founder or founding team becomes a key factor in the minds of pre-Seed investors and convincing them of your leadership and entrepreneurial qualities is core.
That being said, there is no cookie cutter model for a successful entrepreneur; they come from a huge range of backgrounds and career paths.
The five key things early-stage investors like us typically look for in the entrepreneurs are:
1. Ability to get things done
Good entrepreneurs index strongly on getting things done with minimal fuss combined with an ability to focus on doing the right things that will make the most impact.
This is particularly essential in the early days of a company where the founders will have to be hands on and progress is measured in days and weeks rather than months.
2. Vision
Great entrepreneurs have a strong vision for the company they are building and can articulate it clearly. Obviously, that is important for fundraising but it also improves interactions with customers and employees.
Customers are more likely to take a chance on an immature product if they believe in the vision of where it is going and convincing potential employees that they will be making a real difference is a great way to attract exceptional people and build a strong culture.
3. Flexibility
While we look for entrepreneurs with vision, they have to be flexible enough to adapt to feedback.
Founders who think they understand customers’ problems better than the customer are often a red flag. Great entrepreneurs test early and are open to negative feedback as an opportunity to improve their product/vision.
It’s rare that the final product perfectly matches the initial vision and founders have to be flexible enough to accept that. We’ve also seen that founders who are open to feedback can scale with their business, becoming stronger and more mature alongside the company they are building.
4. Resilience
Startups are hard, with long hours, constant pressure and frequent setbacks.
While building a business can be incredibly rewarding, any venture backed startup will go through hard times and we look for entrepreneurs with the resilience to get through them.
The process of raising funding from VCs is intense and often gives insight into how an entrepreneur functions under pressure but we also look for evidence of past hardships overcome and a growth mindset.
5. An edge
Alongside the characteristics mentioned above, we also look for entrepreneurs who have a standout advantage that aligns with the company they are building and differentiates them from the competition.
The edge will vary across founders but examples are: deep technical expertise that provides leads to technology differentiation and helps hire great engineers; strong grasp of product or brand to build a product that resonates with users; subject matter expertise or understanding of the market or the experience or networks build from having previously built a successful business