In this episode we talk about venture capital (VC) firms. Many startups want to raise funding from VCs, but how do VC fund make decisions? How do they think about companies? What goes on behind the scenes after you pitch at VC? We are here to help! In this episode we answer questions including:What steps do VC firms follow to make an investment?What happens when VC partners disagree on an investment?What exactly are VC firms looking for?What are VCs measured by?All of these questions...
In this episode we talk about venture capital (VC) firms. Many startups want to raise funding from VCs, but how do VC fund make decisions? How do they think about companies? What goes on behind the scenes after you pitch at VC? We are here to help! In this episode we answer questions including:
- What steps do VC firms follow to make an investment?
- What happens when VC partners disagree on an investment?
- What exactly are VC firms looking for?
- What are VCs measured by?
All of these questions were submitted by listeners just like you. You can submit questions for us to answer on our website TheStartupHelpdesk.com or on X/Twitter @thestartuphd - we'd love to hear from you!
Your hosts:
- Sean Byrnes: General Partner, Near Horizon www.nearhorizon.vc
- Ash Rust: Managing Partner, Sterling Road www.sterlingroad.com
- Nic Meliones: CEO, Navi www.heynavi.com
Reminder: this is not legal advice or investment advice.
Q1: What steps do VC firms follow to make an investment?
The top of the funnel is massive. It includes founders reaching out cold via email, warm intros from fellow founders, and meetings at conferences. The "email filter" is usually the first point of contact.
From there, the process typically looks like this:
- First Meeting
- Meet the Team
- Team Decision
- Diligence
The funnel narrows at every stage, filtering out 99% of companies. The "golden ticket" is a warm intro from a proven founder. That being said, if you lack a network, you must not shy away from cold outreach – but your pitch must be exceptional to survive the filter.
Q2: What happens when VC partners disagree on an investment?
Understanding the decision process is key. Do they need consensus, or can a single partner push a deal through? During your first meetings, do your own diligence to ask how the firm makes decisions.
You need at least one partner who is obsessed with what you are doing. Treat your lead partner as your internal co-conspirator. Once you leave the room, they have to go to bat for you against skeptics. Don't just pitch your product; pitch the arguments they will need to use to convince their partners to say "yes."
Q3: What exactly are VC firms looking for?
VCs work on behalf of Limited Partners (LPs) to produce returns that beat the market. Because of the Power Law, one win must pay for all the losses in the portfolio.
Therefore, VCs want companies that can grow fast for a long time. They are looking for:
- A Massive Market
- Competitive Advantage (Defensibility/Tech)
- High Velocity
In short, they need proof that the startup has the capacity to achieve escape velocity. This includes a stellar team, strong product engagement, and an acceleration of product adoption.
Q4: What are VCs measured by?
Ultimately, it comes down to DPI (Distributed to Paid-In Capital). This is actual cash returned to investors. When a VC has good numbers on this, it’s all they talk about.
Before DPI, LPs look at interim metrics:
- MOIC (Multiple on Invested Capital): Paper gains on the money invested.
- IRR (Internal Rate of Return): A measure of the speed of growth of investments.
However, for a VC to actually get paid, they need DPI. They need to return the fund multiple times over. Liquidity matters.
The Golden Rule: Every single check a VC writes must have the theoretical potential to return the
entire fund on its own.
