Homebrew Year 3: The Path to Investment

We had an incredible day last Thursday as we got together with our LPs, founders and advisors for our 3rd Annual Meeting to review Homebrew’s progress over the past year.  Hunter already wrote about what we said we know and don’t know after three years of Homebrew.  One of the things we talked about was being eager partners to other investors and also hungry competitors.  But the opportunity to partner or compete is predicated on the lifeblood of any fund: deal flow.

Picking great startups and winning the opportunity to invest in those companies is clearly critical to the success of any VC fund.  But it all starts with seeing the best opportunities in the first place.  Potential investment opportunities can come from known connections like operators, investors, or service providers.  But they also come in cold based on reputation and are generated actively via outbound outreach.  And we do our best to provide an answer (almost always a “no”) to every single company.  After year one, I wrote about our deal funnel.  It’s time to revisit the data after a couple of years of refinement.

Here’s how our overall investment opportunity funnel broke down in 2015:

  • ~1600 opportunities evaluated (100%)
  • 476 companies with first meetings or calls with either me or Hunter (30%)
  • 64 companies that then had a meeting with both or the other one of us (4%)
  • 14 investment offers made (0.9%)
  • 10 investments made (0.6%)

Of the ~1600 opportunities we saw, here is how those opportunities were sourced:

  • 35% from entrepreneurs and executives in our network
  • 27% from other investors (includes angels, VCs, accelerators, etc.)
  • 3% from service providers (legal, finance, etc.)
  • 35% from other sources (inbound, proactive outreach or ideation)

Coopetition and our seat at the table

It might be surprising to some to see that over a quarter of our opportunities come from other investors (up from 16% in our first year) but the VC ecosystem at the seed stage is very cooperative.  Seed rounds seem to range from $1.5m-$2.5m nowadays and most seed firms don’t write checks that large (larger funds are a different story).  As a result, nearly every financing round has a syndicate structure with several VCs and angels participating.  Our approach is to be the investor of record in the round.  To us that means being the lead or co-lead investor (writing one of the larger checks, from $500k to ~$1m) for only 8-10 companies each year, typically taking a board seat and then working closely with the founders to help them build the company that they envision.  

We’re very transparent about this approach with both companies and other investors.  And we work hard to make sure that they see a clear seat at the table for us based on our approach, experience and potential contributions to the company.  Often times we’re able to work with other VCs in supporting a company.  Sometimes it means that we beat out other VCs for the opportunity to invest and sometimes it means that we get beat (4 times in 2015, of which two were originally seed rounds that became Straight to A’s).  But it’s super important to us that irrespective of the outcome with any particular investment opportunity, we treat other VCs with respect and honor their potential contributions to a company.  It’s one reason that we’ve had the good fortune of seeing so many wonderful opportunities from our fellow VCs.

Hustling to find the best opportunities in areas we care about

The percentage of deals that come from other sources has also increased (up 10% from year one), driven largely by our outbound efforts.  While not exclusively thesis-driven, we do spend a lot of time thinking about markets or trends we liked to invest in.  We then take those interest areas and try to identify and contact companies or entrepreneurs doing innovative work in line with our theses.  Not coincidentally, 3 of the investments we made in 2015 were the result of outbound efforts.

Open to inbound

We get a lot of cold inbound emails from founders asking us to invest.  The form emails that are clearly being sent to a large number of investors get rejected quickly.  But on occasion, a truly thoughtful, personalized email appears in our inboxes and grabs our attention.  The sender has clearly done his or her homework on our investment approach and areas of interest.  And the email contains data or a demo that tells a compelling story.

We respond to all cold inquiries because of emails like those and because we want to be at least somewhat helpful to founders who take the time to express interest in working with us.  We believe that there is an opportunity to grow the pie and impact founders beyond just our portfolio given the platform we have as VCs.  And every so often, this “extra” work yields a match.

Just as in Fund I, we have one investment in Fund II that is the direct result of an inbound email without a warm introduction.  You’re much more likely to have success getting any VCs attention if you’re referred to him or her, but if you’re going to send a cold email, make it clear why your company is a potential fit for the investor and back up that story with data or a demo.

Tightening our filter

Since we started Homebrew we’ve continued to refine our investment criteria and judgment to make quicker decisions so that we don’t waste founders’ time and so we can allocate as much time as possible to our existing portfolio companies.  Our goal is to take a deliberate path to conviction rather than circle an opportunity to see how things play.  Our diligence focuses on the questions that we think are appropriate for a seed stage company that hasn’t yet obtained product-market fit, not endless data requests and busy work for founders.

We only take a first meeting or call when we see something about a team, product or market opportunity that signals it could be special.  While we reduced the percentage of companies with which we take a first meeting from 45% to 30% in the past two years, we’d like to continue to drive that number down, probably in the 20-25% range.  Every meeting can be educational or lead to an important relationship, but we err on the side of getting to “no” (and once in awhile “yes”) as quickly as possible.  And usually that means even before a first meeting.

Sticking with unanimous decisions

Every single investment we make is one that both Hunter and I are excited to put sweat and reputation behind.  There’s no such thing as Satya’s investments or Hunter’s investments.  There are only Homebrew investments.  It’s been this way since we started and only if we someday have 3+ partners do we expect that to change.  In the meantime, every company we invest in spends time with both us of during the diligence process.  If after a first meeting (and usually some preliminary diligence) one of us believes that the team, product and market collectively represent a strong candidate for investment, the other partner is brought in to dig on the 2-3 key outstanding questions.

At the end, we believe we need to be early or contrarian (and eventually right!) when making investments.  There has to be something unique about the combination of the team, the product and the problem being addressed that compels us to write a check.  We tend to be less interested when there is a market where a dozen companies are doing effectively the same thing.  Unless we see a very clearly differentiated approach that has long lasting differentiation, we’re likely to pass.  

That’s not to say those companies won’t be successful or won’t be able to raise seed money (in most cases they do).  They’re just not the right opportunities for Homebrew.  Many times we feel very confident that those companies will likely be successful in raising capital beyond the seed round.  But we’re very comfortable foregoing short term write-ups to avoid what we perceive to be long-term pain.  The net is that we’d like to get more efficient in this process as well, decreasing the percentage of companies that meet with both us from 13% of companies that have a first meeting with us to 10%.

For the curious, our average core investment in 2015 was $799k.  We invested in four Bay Area companies, 4 NYC companies and 2 LA companies.  Three of the companies had female members on the co-founding team (including two female CEOs) but none had founders from underrepresented populations.  We’re working diligently to try and address the last issue because we know that to be a top-performing fund we need to back a diverse set of founders.  We also emphasize with our companies that diversity within the first 20 hires will make for better startups.  Finally, we’re doing our best to stay on top of our own unconscious biases.  It’s early, but we hope to make real progress here in the coming year.

So what?

Based on the opportunities that we see, we have great confidence that a very successful fund can be built by investing in the right subset of those companies.  Ultimately, we won’t know for many more years whether our picking will yield an incredible fund.  But we do already know that we’ve invested in incredible people.  People who we are so proud and excited to be working with.  It’s these people and the ones we’ll back in the future that lead us to work every morning.  We’re so lucky they’ve chosen to partner with us.  We try to remember that every day, but it’s never more apparent than on the day of our Annual Meeting.  As Hunter and I said after the meeting “How. F’in. Lucky. Are. We? Very lucky.”  Hoping we’ll continue to be as lucky until our next Annual Meeting!

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What’s your startup’s superpower?

The sky is falling in the venture financing market!  Warnings, exhortations and admonitions are being written and spoken everywhere.  A market in which capital was abundant is now increasingly constrained.  So what’s a startup to do?  The reality is that you probably shouldn’t change anything about your business if you’ve been running it rationally.  Capital is really only a tool at the early stages.  Capital enables you to exist, it doesn’t enable you to win.  More important than ever is being able to answer one question.  What are you going to be the best in the world at doing?  Answering that question will help your company focus on unlocking its superpower, the skill or asset that truly sets it apart in the market.  And that will allow you to survive, and even thrive, in any fundraising environment.  

As a VC, I see a large number of startups, often times multiple startups pursuing the same opportunity at the same time.  In all of these situations, Hunter and I care a ton about the “Why”.  But just as important is the “What”.  And the “What” has to be a vision that contemplates what will truly differentiate the startup in the long term.  Too many companies we see think that being first to market, raising the most capital and spending it quickly will lead to winning.  That’s never been accurate, and it’s both wrong and dangerous in today’s market.

Google is best in the world at search.  Facebook is best in the world at building a social network.  Apple is best in the world at building integrated software and hardware for consumers.  All of those markets are or were incredibly crowded.  But knowing what they wanted to be best in the world at helped them figure out what superpower they needed to develop.  Google knew that to be best in search in needed the best data infrastructure.  Facebook knew that if it wanted the largest social network it needed a competency around growth of that network.  And Apple knew that if it wanted to build devices for the average consumer, it needed simple and beautiful design.  Arguably, these superpowers didn’t just help those companies win.  These superpowers helped them maintain their market leadership as well.

Whether you’re bootstrapping or flush with VC money, it’s worth asking what your startup’s superpower is going to be.  Once you answer that question, you can focus on the development of that superpower rather than on things that make you temporarily different or different in a way that is easy to replicate.  Success at building your superpower will lead capital to seek you out, even in a market where it’s trying to hide.

Busy, but not productive

The founders we meet each month are always passionate, ambitious and determined.  And they’re always working like mad.  But too often, especially as of late, I find that they’re making little to no progress despite their endless work.  This isn’t because their ideas are bad, their teams are weak or they’re capital constrained.  It’s because they’ve fallen into the trap of being busy, but not productive.         

It’s so easy as a startup to spend your hours building, selling, recruiting, etc.  You always want to be doing something.  What startup founder doesn’t say that he or she is “really busy” when asked how they’re doing?  Because if you’re doing something, you’re surely making progress, right?  Unfortunately, not really.  Progress at a startup is ultimately measured not by hours but by risk.  In the early days of a company, everything is uncertain and the risk is extraordinary.  Progress is made by reducing risk.  And the only way to reduce risk, is to learn.  Being productive at a startup means focusing all of your activity on learning so that you can reduce risk in the business.  

Unfortunately, for lots of startups, learning takes the form of doing something and then seeing what happens.  That’s not learning.  That’s just being busy.  True learning requires asking a question and forming a hypothesis before taking action.  That action (a test or an experiment) then helps you prove or disprove your hypothesis.  In addition, most founders think about learning only in the context of their products.  But being productive and focused on learning applies to every aspect of the business.  Marketing, hiring, pricing, etc. all need to be hypothesis-driven so that you’re always learning about whether you’re targeting the right customer, hiring someone with the right experience or capturing the right value for your product.  

It’s only learning that helps you reduce the risk in your business.  And ultimately, that’s what enables you to attract capital when the time comes.  During your next fundraise, any new potential investor is going to want to know what you’ve done since the last investment.  That’s really his or her way of asking what risks have been reduced or eliminated in the business.  They don’t want to pay a higher price for the same risk that earlier investors took.  They only want to pay up for reduced risk.  That comes from being productive instead of just busy.

The two goals of startup fundraising

Money’s been flowing. VCs have been investing money at levels not seen since the bubble year of 2000. Entrepreneurs have been raising enormous amounts of money at valuations that assume years of future growth and eventual profitability. So what’s the downside of all this? That entrepreneurs mistake what they’re reading on Techcrunch as the reality for their own companies both now and for the foreseeable future. Raising money seems like a cakewalk, but that’s only because you don’t read about the failed financings, down rounds and recaps nearly as much as the unicorns and decacorns. And warning signs are emerging that the cascade of cash is about to end. The reality may be very different soon, and that’s something that we’ve emphasized to our Homebrew partner companies as they’ve hit the fundraising trail this year. Fundraising is confusing, frustrating and all-consuming at its worst and informative, exciting and rewarding at its best. But regardless of the process, we like to say that for all startups there are only two goals in the fundraising process: put money in the bank and maintain optionality.

Put money in the bank: The number one goal of fundraising is to get money in the bank so that you have the opportunity to solve the problem you set out to solve. If you’re fortunate enough to have a story or metrics that attract multiple term sheets, feel free to aggressively negotiate pricing, structure, syndicate partners, etc. But more likely is that you won’t have so many options and you’ll need to accept the terms you’re offered (more or less) so that you can live to fight another day. The number one cause of company failure is running out of money. And many times the key to winning is just surviving so that market timing finally lines up with your product or service. If you want to build a high-growth, venture-backed startup, do whatever it takes to push cash on the balance sheet. That way, you’ll be able to fund operations to hit the next set of milestones that will allow you to raise additional capital or achieve profitability.

Maintain optionality: It’s incredibly tempting to raise as much money as you can at as high a valuation as you can. All startups believe that with more money they will accomplish more in the same amount of time. But in our experience, constraint is what yields innovation and results. More money typically yields more spending. Companies often end up trying to solve problems by hiring more people and burning more cash. In the meantime, the bar for the next financing has been set much higher because investors expect to see greater results given the larger amount of money and the higher price at which it was raised. Everytime you raise money, consider that you’re cutting off possible paths in your financing/exit decision tree with every increase in dollars raised and valuation. While every founder envisions building a unicorn, the odds are that if your company is successful, that success will be at an exit value much lower than $1 billion. So why not approach your financing in a way that maximizes your options for raising more money when you have additional data that gives you the confidence to take more risk and double down on the business? Or why not maintain the option of accepting an acquisition offer or going public at a fair valuation and still generating incredible wealth for you, your employees and your investors? With a currently mixed exit environment (even for unicorns) and historical exit data skewing much lower than $200 million, maintaining optionality through your financing can be the difference between surviving or winning and the failed financings, down rounds and recaps that no one wants to talk about.

Raising large amounts of money has been glorified. Being able to do it quickly and painlessly has become the expectation. But the reality is very different and likely to become more so as the market adjusts to a reality with few exits and difficult to justify valuations. So just remember that at the end of the day, only two things matter when it comes to fundraising. Put money in the bank and maintain optionality. Give yourself the ability to control your startup’s destiny and take on more risk only when you feel ready.

Startups are hard. Don’t go it alone.

I suppose I shouldn’t be surprised that with the continuous growth in the number of startups (we’re seeing between 150 and 200 new seed opportunities per month at Homebrew), we’re also seeing a related trend in the growing number of companies being started by solo founders.  I’ve taken a particular interest in this because Hunter and I have a strong bias against investing in solo founders (although we have done it once so far).  This clear shift in the market caused me to reflect on why we prefer founding teams over founding individuals.  In fact, we prefer teams that have known each for a long time and ideally have worked together before.  While solo founders can absolutely build great companies, I think we’re right that having a founding team materially increases the chances for success.  Building a great company is hard enough.  It’s even harder to do it alone.  In no particular order, here’s why having co-founders can be helpful:

Idea validation: If you can’t convince someone else to join you in pursuing your idea, maybe it’s not worth pursuing.

Pressure to perform: Having a co-founder makes you responsible to someone else, which in turn puts pressure on you to deliver results, probably faster than you might otherwise.

Emotional outlet: In startups the highs can be high but the lows can be low.  And the inevitable trough of sorrow can be a lonely place.  Surviving the anxiety and emotion of a startup can be much easier when the burden is shared.  It’s great to see much more dialogue about the emotional challenges of being a founder.  One way of fighting depression and other forms of emotional distress is by having a co-founder with whom you can be open and honest about your fears, struggles and insecurities.

Skill diversity: No one person, no matter how brilliant, has all of the skills needed to make a startup successful. Having co-founders with complementary skills can make it much easier for each person to say no to everything but the tasks most critical to achieving success.

Hiring strength: Multiple people on the team means a broader network from which to recruit, a diversity of skills with which to evaluate candidates and a more pronounced culture for potential hires to experience.  Having co-founders just makes hiring easier.

Sounding board: Co-founders lie awake at night worrying about the same things as you. They’re just as committed to the mission as you. And they’re equally invested in seeing all parts of the company work as you.  And so they will challenge you, scold you and push you (and often hug you) unlike anyone else at the company can or will.

It’s important to note that having a co-founder just for the sake of having one, or randomly meeting one at a “dating” event, isn’t the answer.  Having the wrong co-founder can be more damaging than going to alone.  There’s lots more to say about finding the right co-founder(s), but it starts with having shared vision, shared experience, trust and complementary skills.  It means having alignment on goals, culture and values.  It doesn’t necessarily require equal equity or compensation, but it does mean early agreement on those things.  Finding the right co-founders can be challenging, but we strongly believe that the startups most likely to become the best companies are founded by teams that belong together.

Successful startups say “no”

“The difference between successful people and very successful people is that very successful people say “no” to almost everything.” – Warren Buffett

We’ve been spending the past few weeks at Homebrew helping several of our portfolio companies work through their planning for 2015.  It’s no surprise that during these conversations incredible ideas for new products and features, partnerships, revenue streams, technologies, etc., emerge.  So we and our founders all remind ourselves about the value of doing just one thing (or a very small number of things) exceptionally well.

Often times it’s easier for companies to choose to do lots of different things.  New initiatives are fun and energizing and get lots of attention while the effort required be truly exceptional at one thing can be an exhausting grind.  But being adequate at lots of things almost always comes at the expense of being excellent at the most important thing.  Great companies are born of focused excellence.  Google was the best at search before it expanded into new product areas and markets.  Facebook was a powerful social network before venturing into mobile communications and virtual reality.  Narrowing from lots of good ideas to just the most critical ones is the lifeblood of a successful company.  We constantly remind our teams that startups rarely die from lack of ambition, only from a lack of focus.  And we insist that there’s incredible power in saying “No” to the things that distract them from being best in the world at whatever they are doing.

So what are examples of  things that startups should be saying “No” to so they can focus on what really matters?

  • Settling for the good enough hire: It’s tempting to fill the hole on the team that seems like the obstacle to progress.  But hiring people with enough aptitude but the wrong attitude is guaranteed to impede and even reverse progress in the long run.  These kinds of early hiring mistakes can cripple a company.
  • Building new products or more features: There’s that one customer that is willing to pay a lot for just one new feature.  Or if you just add this small feature that will solve your user growth problem.  Or you’ve got early customers that love your product so you want to give them more to love before growing the customer base.  Do any of these help you deliver the simplest offering for the core use case you’ve identified?  Are you sure that you’re not iterating toward a local maximum versus placing a bet that might unearth a global maximum?
  • Short term revenue: Revenue can be found in lots of places, such as consulting contracts, project development work, one-time ad sponsorships, etc. But does generating revenue in an ad hoc way help you build a business that will scale and be sustainable?  Is the revenue you’re generating the income stream you want to bet on long term?
  • Potential investors: The dirty little secret about “coffee meetings” with investors is that even though they’re positioned as relationship building, you have to treat them like you’re actively fundraising.  Because most investors are judging you and your business in every interaction (a few are genuinely trying to be helpful or to get to know you).  So the easiest thing to do is politely pass on that coffee and stay focused on the business until you really want to be fundraising.
  • Big company partners: Big companies offer the promise of distribution, revenue, resources and many other things. But the vast majority of the time you get stuck in a never-ending cycle of meetings, negotiations and more meetings.  And if a partnership is struck, the likelihood of it amounting to anything is next to zero.  In the meantime, you’ve taken up a ton of time, resources and mental energy that has a real opportunity cost.  More often than not, these types of relationships can be all consuming for small companies and can distract them from your ultimate goals.
  • Corporate development: See Paul Graham’s excellent post.
  • Networking events: Just build a great company.  Your network will grow because you’re creating something incredible, not because you drank beer and ate cold pizza with a bunch of entrepreneurs in a converted warehouse somewhere.

At Homebrew, our primary goal with Fund I has been to overdeliver on our brand promise to the founders who’ve chosen to partner with us.  We prioritize our time and efforts such that the needs of our companies come first.  We often choose to pass on meeting with new startups, speaking at conferences, attending happy hours, etc., because none of those are immediately and directly in service of our founders.  And we’ve found that because we’ve made making these types of choice a habit, they get easier to make over time.

Saying “no” absolutely requires discipline and grit, because “yes” doesn’t disappoint someone or necessitate a difficult conversation.  But there is real value in saying “no” because it orients startups towards spending their limited time and resources on doing just one thing incredibly well.  And if you can do one thing exceptionally well, chances are you’ll have the opportunity to try another in time.

Any other things startups should say no to in the interest of focus and pursuing excellence?

What We’re Curious About at Homebrew…

Every day we meet amazing founders sharing their ideas for how the future will evolve. In fact, we see about 150 new companies each month. Where do these teams originate from? Roughly 65% are referred to us by other founders or people we know. 25% are introductions via investors – either angels or VCs. The remaining 10% are a combination of cold inbound/outbound sourcing, often based upon a specific area we’re investigating. So recently we asked ourselves a question “is there strategic value in keeping our list of interests to ourselves?” That didn’t seem like a very good idea if our goal is to connect with thoughtful founders or inspire conversation. And thus http://bit.ly/HomebrewWhatIfs

What Ifs will be an dynamic list of ideas, questions and technologies that we are curious about and specifically want to connect with entrepreneurs to discuss and learn. We’ll edit, add and remove items as appropriate and link to our longer blog posts when it makes sense.

If you’re a founder in one of these areas or someone with domain expertise, we hope you’ll reach out. Do we hope to find new investments this way? Sure, but we’re also happy to just learn and hopefully help.

What makes a great product manager?

This week I had the good fortune of attending a fantastic mentorship event for product managers organized by Josh Elman and Mina Radhakrishnan. In small groups, newer PMs had the opportunity to ask more experienced PMs questions about any topic related to product management or being a PM. One of questions in my group was, “What makes a great product manager?” I answered the question (hopefully helpfully!) by sharing what I look for when hiring a PM.

It begins with my firm belief that you need to hire PMs for attitude over aptitude. Product management done the right way is an unglamorous job executed with no formal authority. It requires PMs to accept that they need to be shit umbrellas and credit funnels. The job cannot be done without having as much EQ as IQ. And while many product management skills can be learned, I’ve found that attitude is something that can’t be taught. So hiring great PMs starts with attitude. But there are also four categories of skills that I believe are important for PMs to have in order for them to be great.

Product insight. Insight begins with empathy with the user. The best product managers are able to imagine themselves in the user’s situation and develop products that address the needs identified in those situations as simply and powerfully as possible. At the same time, they’re able to use data, ideas and feedback from many sources to inform and support the product decisions made in response to those needs.

Product execution. Potentially nothing is more important for PMs than the ability to just get shit done. No amount of insight compensates for an inability to help teams ship products. And that requires a relentless focus on doing whatever is necessary; to be the person who fills all the gaps and helps others to be successful. Great PMs are able to prioritize and do a small number of the right things incredibly well.

Over-communication. The best PMs establish trust with those around them, making themselves and their teams more effective as a result. I’ve found that the best of way of developing trust is not just by communicating, but by erring on the side of over-communicating. Great PMs need to be both willing and able to communicate clearly, concisely and often to make sure their teams have shared goals and that everyone impacted by product decisions has a shared understanding of why those decisions are being made.

Leadership. PMs need to lead without any formal authority. They inspire and motivate by articulating a compelling product vision and strategy. They establish credibility by setting clear objectives and roadmaps in partnership with their teams. And they earn trust by being honest and accountable. No PM accomplishes anything without a team that is willing to be led by him or her.

Because I believe that these “soft” skills matter much more than “hard” skills, I’ve sought out and been able to hire great PMs who come from all sorts of backgrounds. If you’re fortunate enough to come across the rare PM that has both the right attitude and demonstrated aptitude, definitely hire him or her. But if you meet a PM candidate with a stellar attitude yet only high potential aptitude, I’d encourage you to bet on that person. That bet will pay off in spades for both of you.

The only way to raise money: Make them believe

Ignore what you’re reading about the current investment climate.  Yep, there is plenty of VC money out there and it’s aggressively looking for a home.  But that doesn’t mean it’s so much easier to raise money than in prior years.  The number of startups vying for those dollars is greater than ever.  With so much noise in the market and so many companies in which VCs can invest their cash, raising money is still about the one thing it’s always been about: making a VC believe.

There are many perceived reasons for why VCs make investment decisions.  But the reality is that it’s actually emotion that leads most VCs to invest.  A VC only invests when she finds a quality in a startup that touches upon something personally meaningful or important to her; a quality that creates an irrational belief in the startup’s ability to succeed.  I refer to this feeling as “emotional resonance”.  There are only three qualities that enable a startup to create emotional resonance with an investor.  If you don’t create “belief” based on one of these things, take your pitch and go home because there’s no term sheet coming your way.

People: The best way of creating emotional resonance is through your team.  Despite popular opinion, VCs are people too!  Just like entrepreneurs and employees, they also want to surround themselves with people they love to work with and can learn from.  They want to support founders who they deeply feel deserve tremendous success or who compel them to believe in the likelihood of their success.  Belief might spring from any number of team characteristics, including the team’s story, chemistry or insights.  Given this, it’s no surprise that most VCs will tell you that they invest in people first.  And that’s true.  It’s the emotional connection to those people that leads to the investment.

Potential: The second way of building an emotional connection is via the potential of your business.  The potential might be captured by the mission or the market opportunity or the product.  But somehow you need to leave the VC feeling that he or she absolutely wants the problem you’ve identified to be solved or what you’re doing to exist in the world and that it will be big.  This is why VCs have a hard time investing in products and companies that aren’t targeted towards them.  Something that’s not relatable is impossible to connect with emotionally.  It’s the promise of an early stage startup that can help a VC make the emotional decision to ignore the difficult reality that most startups fail.

Proof: If you’re an early stage company, you don’t have it.  Move on.

So have only one goal in your pitch to VCs.  Make them believe.  Create emotional resonance with your people or your potential.  If your story doesn’t do that, rework it so that you focus on establishing one of those connections.  Present the opportunity in a way that reinforces the excellence of the team or the enormity of your potential.  Because the only path to a VC’s money is still through emotion.