If you know about venture capital in general, you already know that most technology startups are not a fit for the VC firm's business model.
My question is whether it's possible to systematically determine whether your startup's target market is a fit for this kind of investment in the first place. There's no point in putting the effort into a pitch that has no chance of being considered, but on the other hand, it seems like a waste to ignore VC if it could be a strong match. Any feedback?
What do you mean by "not a fit for the VC firm's business model"? Do you mean expected IRR?
Re: "putting the effort into a pitch" - most pitches don't happen until there's been an initial deck review, so have your 10-15 slide deck ready, blast it to VCs you find relevant, and if they feel you're a fit, then you might be a fit.
Dave, it's true that VC funds typically have a sector focus (and often a geographic focus as well), but there are many, many VC funds and even different funds within the same firm might have different criteria. For example, a given firm might include a fund for Internet Technology and a different fund for Life Sciences, and both funds might be focused on Series A opportunities in a particular geography.
You can waste a lot of your time (and a lot of other people's time) by spamming your pitch to 1,000 VC firms. So take the time to filter for prospects that fit your sector and geography.
VCs target big markets; here "big" is probably where you can build a company that could be worth $10B or more.
It is true that many VCs have already decided to invest into particular big markets, or to focus on specific technologies, but the general rule is just size, not some kind of arbitrary list. And the choice to focus on specific technologies or markets relates to a belief that those ones will be big, not because of some other reason.
It is a very interesting Question.
Here is my opinion:
- It is not a waste of time to approach VC's as long as you are approaching the right one!
How to define the right VC?
You will normally need to identify the industry or segment they are interested in, and to check the Specific Series of funding they are interested in ( some choose to fund Series B, or C.
So with the right Pitching Presentation, right VC industry in mind you can get the fund you need.
Three things any Angel Investor/ VC will consider when choosing a startup to invest in ( Scalability, Profitability, and Uniqueness) of what you are offering.
Although there are VCs that exclusively focus on specific industries, your question doesn't seem to be about that. VCs generally care about the risk vs. return, not as much the market or industry. A rule of thumb in being considered for VC money is that if your company does not have a likelihood of reaching a revenue number equal to the VC fund's current total assets, you're not likely going to be considered. That means if the VC fund has $50MM in investments, your company must also have the potential to become a $50MM company within a reasonable time period for them to see you as an ideal match. That doesn't mean there aren't smaller companies that receive investments, just less likely. If 1:100 invested companies typically succeeds financially, then the risks are covered this way by the one big success. The other criteria for VC funding is typically that your business is already established and trying to expand, that you are well beyond proof of concept. This rule-of-thumb advice was given to me by the senior investment attorney at one of the largest firms in the world. The rule-of-thumb criteria for PE, Angel, and other investment types are different.