James Spurway

This prompt and the comments so far assume a later stage investor. When investing in pre-seed or seed stage startups, your "deal sourcing" software is called "become a mentor and founder at high-ranking incubators and accelerators that focus on the sector or vertical you intend to invest in" and your evaluation software is a "MS PowerPoint or Google Slides" pitch deck.

All of the mechanisms mentioned have some part to play I suppose. However, by the time you have secured the conditions you feel protect your future interests, you have lost whatever trust and goodwill you started with when you "found" the amazing startup you wanted to invest in. If you don't believe me, ask your founders to rate their experience during the term sheet and investment docs phases. What protects you from avoidable disasters is a close two-way relationship with the Founders/CEO, actually reading the reports they send and questioning KPI numbers when you gut tells you to, and being prepared to take decisive action when market conditions adversely affect your portfolio company and all others in the same sector/vertical.

As an investor attending a demo day event, whether that is 500 Global, YC et al, or a more focused event, this is what I'm focused on: 1. I want to see a person who is confident, proud and in control. 2. I want founders to pace their speech, use some pauses for effect, project their voice and use intonation to make important points. 3.Ideally, I want to feel moved…I want to connect to the founder...I want to feel goosebumps. 4. When I hear a problem-solution set that is large, is a burning need, and I have not seen it before, I sit up straight. When the Founder hits all the right notes after that from traction to team to ask etc., I’m going to make contact and set up a meeting.

A VCs ROI often depends on whether they lead or follow. VC founders must decide whether they have the team size, skill set, track record, origination network and investor support to lead. In the US the ratio of follower VCs to lead VCs is around 3:1. That ratio is much higher (I can't find an exact number) for the rest of the world. The point is that if you don't lead, you can calibrate the six factors mentioned in this article into a strategy, but if you can't secure a spot on the CAP table of the targets you want to invest in, at a price you've based your fund's return on, then the strategy is null and void. That's why angel syndicates can sometimes deliver better LP ROIs. They act like lead VCs and enter very early.

I'm sorry to say that in several cases I've experienced as an investor, the reason we got into an impasse in the first place was well meaning yet what I would call "boiler plate/template" advice to the founders by domain experts who themselves had not raised multiple rounds for multiple startups and had never been in a startup that executed an exit. I remember how unsure I was when I started my first business, hence I appreciate the fact that Founders feel the need to bring in IP and support from outside. They just have to match advice they receive to the relevant experience of the person giving it.

One thing I've found helpful is this simple statement: "You can't bank percentages, you can only bank dollars (fill in the local currency". This cuts through when resistance is based on how much of the pie they will be left with.