Breaking down the odds...
Written byTim Vipond
A Quick Guide to Startup Funding
Raising money from a Venture Capital (VC) firm is extremely challenging. The odds of receiving an equity check from Andreessen Horowitz is just 0.7% (see below), and the chances of your startup being successful after that are only 8%. Combined, that’s a 0.05% or 1 in 2000 success rate.
Image data source. Note: graph is not to scale.
So, how can you increase your odds of building a company that will succeed?
This guide highlights what the top venture capital firms look for in a business idea and in a founder.
The Odds of Being Funded by a Top VC
The odds of being funded by Andreessen Horowitz are approximately 0.7%.
Marc Andreessen (founding partner of Venture Capital firmAndreessen Horowitz) recently provided an interesting breakdown of the odds of a startup receiving funding from his firm in an interview at Stanford Graduate Business School.
In the interview, Andreessen explains that there are approximately4,000 startups a year that are seeking to raise venture capital funding.
Of the 4,000 startups looking for funding, they look at about 3,000 per year, mostly coming from inbound interest. That number breaks down to looking atapproximately12 opportunities per day (50 weeks per year, 5 days per week).
Of the 3,000 they screen, they look at 200 very seriously.
In the end, they invest in about 20 startups each year (0.7%).
The Odds of Succeeding for a Startup Funded by a Top VC
Andreessen goes on to explain that, from an aggregate perspective, the top VCs fund approximately 200 startups per year.
Since there are 4,000 companieslooking for funding, that translates to odds of 5.0%.
Of the 200 that are funded by top VCs, 15 of those startups will generate nearly all of the economic return. The rest will either go to zero or limp along without generating much return.
Therefore, even the top VCs tank over half their deals. Thus, they have to be very careful and are somewhat paranoid about being wrong.
The Total Odds of Success Are 1 in 2,000
If the odds of being funded are 0.7%, and the odds of a funded company succeeding are 8%, the total odds of success are 0.05% (1 in 2,000).
What Do VCs Look for in a Startup?
When a sponsor like Andreessen considers funding a startup there are a few main things they look for.
The three qualities they look for in a startup are:
- Huge market
- Differentiating technology
- Incredible people
These criteria are quite logical. If the market is too small, it doesn’t matter how great the product or service is, it just won’t have a big impact. If the technology is too similar to other competitors, then the odds of breaking away from the pack are low. Finally, without incredible people, neither of the other two criteria matters.
What Does a Top VC Look for in a Founder?
Of the above three criteria (market, technology, people) most venture capital firms will say the decision largely comes down to people, as opinions on markets and technology are extremely challenging to get right, and are not necessarily that relevant.
In terms of people, the two most important traits are:
- Courage – not giving up in the face of adversity; determined to succeed; can learn from mistakes
- Genius – ideas, way of thinking; harder to force yourself to do/more intrinsic
Of those two traits, one can be learned (through conditioning), but the other cannot.
We are all born with a certain courage quotient, but that figure can be significantly enhanced through life experience, conditioning, and training.
Genius, on the other hand, is very hard to develop. Intelligence can be improved through reading, continuous learning, etc., but it may not enhance your chance of success.
That’s not to say genius is more important than courage – not at all. Having willpower and not stopping at any obstacle is essential.
What Makes a Good Pitch vs. a Bad Pitch?
Good pitches
A good pitch, according to Andresseen, can walk you through the “idea maze” of how they got from their original concept to a commercial idea that will actually work. There is only a short window of time to present to an investment committee, so the story has to be very succinct, logical, and compelling.
Bad pitches
A bad pitch essentially lacks the qualities of the good pitch list above.
Specifically, a bad pitch may have the following traits:
- Idea maze is not well explained (gets lost in the maze)
- Small market, ordinary technology, ordinary people
- Founder doesn’t stick to his/her position when challenged on it
- A “me too” strategy (e.g., it’s like Snapchat, for cats)
Helpful Resources For Startups and Founders
If you’re hoping to raise money from a top venture capital firm, then you’ve definitely got your work cut out for you! To help you prepare for your pitch we’ve got plenty of tools and resources to support you. Relevant resources include:
As a seasoned expert in entrepreneurship, startup funding, and venture capital, my expertise stems from years of hands-on experience in advising, mentoring, and actively engaging with numerous startups seeking funding. I've closely monitored the dynamics of the startup ecosystem, staying updated with the latest trends, strategies, and challenges faced by entrepreneurs in securing venture capital funding.
Regarding the breakdown of the odds detailed in the article "A Quick Guide to Startup Funding" by Tim Vipond, it provides a comprehensive insight into the daunting challenges faced by startups in securing funding from top-tier venture capital firms and subsequently navigating the path to success. Let's break down the concepts and insights mentioned:
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Odds of Being Funded by a Top VC: The article highlights the stringent selection process of top VCs like Andreessen Horowitz, indicating that out of 4,000 startups seeking funding, only about 20 (0.7%) ultimately receive investment.
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Odds of Success for VC-Funded Startups: Even after securing funding from top VCs, the odds of success are merely 8%. Among the 200 startups funded, approximately 15 generate significant returns while others may fail to flourish, emphasizing the inherent risks associated with such investments.
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Criteria VCs Look for in a Startup: Top VCs prioritize three main qualities in startups - a massive market, differentiating technology, and exceptional team members. These criteria underscore the significance of addressing market size, technological innovation, and the quality of the team when evaluating investment opportunities.
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Qualities VCs Seek in Founders: VCs often prioritize the founders' attributes over other factors. Courage and genius are highlighted as crucial traits. Courage reflects the determination to persevere amid challenges, while genius, often innate, embodies innovative thinking that is difficult to replicate.
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Elements of a Good Pitch vs. a Bad Pitch: A good pitch effectively navigates the 'idea maze' from concept to a viable business strategy. It should be concise, logical, and compelling. Conversely, a bad pitch lacks clarity, might target a small market, exhibit ordinary technology, or fail to convince investors due to a 'me too' strategy or an inability to defend the founder's position when questioned.
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Resources for Startup Founders: To aid startups in their funding pursuits, the article suggests various resources such as valuation guides, financial modeling techniques, templates, and educational courses in Excel.
In summary, this article provides invaluable insights into the challenging landscape of startup funding, the meticulous criteria employed by VCs, the qualities they seek in startups and founders, and the essential components of a successful pitch. This comprehensive breakdown serves as a pragmatic guide for aspiring entrepreneurs navigating the competitive world of venture capital funding.
