How do seed VCs pick their investments?

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On Friday, I spent a couple of hours at my alma mater talking with student entrepreneurs about their companies.  When I got there, most of them wanted to know how VCs pick their investments and what 500 Startups look for.

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I didn’t answer this.

Instead, I said, “Let’s pretend we’re all forming a VC firm right now.  And there’s an entrepreneur coming into the room in 10 minutes.  What questions would you ask him/her to decide if you’re going to invest?”

I wasn’t sure what people would come up with, but here’s the list of questions the group collectively came up with in 10 minutes with my commentary in brackets:

Team

  • Do you have a strong team? [Get more specific – what does that mean?]
  • Does the team have particular domain knowledge or expertise?
  • Have the co-founders worked together before?
  • Can they change directions quickly if needed and make fast, difficult decisions?
  • [What about perseverance, grit, tenacity?]
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Originally posted by ixaurore

Customers and traction

  • Do they have product or market fit? [Get more specific – what questions would you ask to figure this out?]
  • Do they have customers? How many?
  • Who exactly is the customer?
  • Are they paying? If so how much?
  • How frequently are customers buying or using? [Or churning]
  • How much does it cost to get a customer?
  • What is a customer worth? [lifetime value]
  • [How much revenue are you making and how has this changed over the last few months? What are your margins?]
  • [How are they getting customers?  What customer acquisition channels have they tried or not tried ?]
  • [Is this growing? How quickly?]
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Originally posted by littlehorrorshop

Market

  • What is the market size? [I have disputes about this one but that is a topic for another post]

Problem and solution

  • What specific problem are you solving?
  • [Why are you doing this?  Motivation?]
  • What makes your solution unique or differentiated?
  • Is there any special tech or IP here? [In many cases, probably not worth asking]
  • What is your unfair advantage? [Often there is little-to-none in the beginning but worth asking about this to see how entrepreneurs think about this and see if there is special domain knowledge or special relationships & partnerships]
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Originally posted by amidallas

Other

  • What is the cost of equity ownership? [May or may not ask this depending on if our hypothetical VC firm leads rounds or not]
  • [What is a team’s burn rate?]

Obviously, if we had brought in a real entrepreneur to talk with, the list would also include more specific questions about the particular business and/or how the product works.

I was pretty impressed by this laundry list of questions they generated – not bad for 10 minutes!  It looks like I can go retire on a beach somewhere.

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