What are some of the success factors and metrics for venture capital?

Typically, the VC will want any given investment to possibly "return the fund." So, if it is a $100M fund, the viable investments are those that might exit with a valuation supporting $100M back to the VC. If it is a $1B fund, then the VC is looking for $1B back to the fund. From the founder's point of view, this determines which funds are appropriate for her company. From the VC's point of view, this is a quick screening criterion on pitches.

VC funds have one obsession, finding that super-returner (call it unicorn). Amongst 20-30 investments, they need to hit that Unicorn returner. If they don't, their fund performance will be subpar, and they will grind to convince their LPs to continue backing them. You have to demonstrate WHY you will turn into that Unicorn. Period. To do so, you need to convince the investors that: -Your market is enormous -Your team has that unfair advantage to tackle that market (market insights, network, customer access,...etc) -Your product is sufficiently differentiated and can offer 10x more or better than what already exists -Your vision is so crisp, you're telling them about the future. -You just need money to make it a reality

The "fit" between the VC and the startup can also be crucial. Some VCs specialize in certain sectors or stages of a company's growth, which could make them more or less interested in a particular market opportunity. Additionally, market opportunity alone isn't enough. VCs often look at the startup's team, the technology, and the scalability when making an investment decision. However, all these factors often relate to how they perceive the market opportunity.

Success in venture capital significantly depends on accurately gauging the market opportunity. VCs assess whether a startup is positioned in a large and growing market, as this often correlates with the potential for high returns. The evaluation goes beyond current market size; it involves analyzing market trends, potential for disruption, and scalability of the startup's product or service. For instance, a VC looking at a fintech startup would consider not just the immediate financial services market size but also the emerging trends in digital payments and regulatory shifts. This thorough market analysis is a key metric that underpins successful venture capital investments.

In venture capital, success banks on a great team, market validation, and scalability. Metrics like ROI, growth rate, CAC to LTV ratio, and burn rate are pivotal in gauging potential and minimizing risks for VCs aiming for success.

Think about the early days of Google. The founders, Larry Page and Sergey Brin, were both Ph.D. students at Stanford, bringing in top-tier technical skills and a strong educational background. Their advisor was a well-known computer science professor, which added credibility. The initial team was cohesive, had a clear vision for the search engine, and eventually built an innovative and employee-friendly company culture. This would have been seen as a high-quality team in the eyes of a VC. Further, Startups often have to pivot or adjust their strategies, and a team's ability to adapt can be a key determinant of success. VCs might look for past examples of how the team adapted to challenges to indicate future performance.

VCs want to see cohesion on the team. They want to see that the founder is coachable. The VC has a huge amount of reference companies, and this knowledge bank can be useful to the founder who listens. Often the VC will give preference to founders who have experience. But, in a hot new area, or with really energetic new individuals, first-time founders can have an advantage.

Consider Airbnb. In its early days, one key indicator of growth and traction was the number of listings and bookings. As these numbers grew, it showed VCs that not only were people willing to list their homes, but travellers were also keen on this new way of lodging. This made it easier for Airbnb to secure more funding, as they were showing clear evidence of a scalable and viable business model. In my experience, VCs often look for startups that are not just growing but are growing faster over time. A startup that shows accelerating growth might be more appealing because it suggests that they're onto something that's gaining popularity fast.

Valuation is important, however you may be surprised at early stages with fast growing startups, this does not get enough attention. As long as the lead investor sets a somewhat reasonable valuation, the follower, smaller and micro VCs don’t negotiate on this too much. This is because in micro stakes, for a micro fund, the exit of small equity holding can still be a fund returner. In later stages valuation plays a lot heavier of a consideration. We should still do our due diligence on valuation in its entirety. But certain VCs just want a piece of the action.

Think of the valuation of Uber before it went public. VCs looked at the size of the transportation market, the growth and traction Uber was experiencing, and how other startups in the 'gig economy' were valued. When it came to terms, they would've looked at things like how much control they would have, what happens if Uber gets sold, and so on. In my experience, a crucial aspect is "negotiation leverage." Sometimes, who has more bargaining power (the startup or the VC) can significantly affect the valuation and terms. For example, a startup with multiple VC offers might negotiate a higher valuation and more favourable terms.

There are both good exits and bad exits. Exit strategy helps a venture capitalist understand the paths to get their money back. The most common are acquisitions, IPO or secondary sale. There’s also the risk of the founder taking an exit opportunity too early. This can be due to an upside for them - eg a job at a larger company, but the purchase price may not provide value to the investor. We have even seen founders sell their company to focus on another side business. Exits can also be arranged to cut losses.

In my experience, i have seen that VCs push for a particular exit strategy that aligns more with their fund’s timeline rather than what might be best for the startup in the long term. For instance, if a VC fund is nearing the end of its life, the investors might push for a quicker exit to show returns to their investors.

A large challenge today is reporting on true impact. The concept of “greenwashing” exists here too. Impact is growing as a highly desired startup trait for investors. Even the public stock market is trying to show that impact businesses can be growth stocks. Certain investors are focused on their impact only thesis as well. There are certain platforms that support data entry to help track this, but the next generation of embedded technology will simplify measuring this and give us accuracy. Think chips/modules in machinery in factories that measure energy usage, or resource consumption. Of course this is only an industry application and needs to spread wider, and now be built in to all verticals.

As an LP to a VC fund: - investing phase: MOIC, TVPI, % companies marked up - divesting phase: DPI, CoC As a VC fund to a venture: - Signals of PMF (strong pipeline, sales funnel conversions, willingness to pay) - Profitability (or clear path towards that) - Capital Efficiency - Clear signals of potential exit cases

At GO Ventures, we take each investment opportunity through a unique assessment. Our qualitative assessment take as much weight as the quantitative. While going through documentation to understand the upsides are great, nothing beats speaking to the founders. A conversation with the founders tells us more about their chances of success than a pre-rehearsed pitch deck. Here we see their ability to work together and how in sync they are about the vision of their business. This is a foundational assessment as VCs need to be sure that these founders are aligned and can work together for the better part of a decade.