ELIAN D. ALVAREZ

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What do Venture Capitalists Look for in a Startup?

May
26

Billions of dollars are invested in new startups every year. Therefore, it has become even more important to find the answer to the following question: what do venture capitalists want?

A venture capital firm called Draper Fisher Jurvetson (DFJ Venture Capital) that has injected funds in around 2 dozen unicorns, including Twitter, Tumblr, Skype, and Box. One of its partners, Steve Jurvetson, shared his views on what he looks for in a startup when he plans to make an investment

 

Enthusiastic Founder

Jurvetson said that the first thing he notices is how enthusiastic the owner of a startup is – someone like Elon Musk who can convince that their idea will work. However, he added that it has to be in a sector which will contribute to the rapid growth of an economy during the times of huge disruptive change.

 

Innovation

In today’s rapidly changing world, innovation is a key to success. Products, such as electric cars, rockets, synthetic biology, etc., have proven to be the game changers in the IT sector. They never managed to attract venture capital in the past decades, but are high in demand nowadays. These industries have undergone massive change in the past few years, which is good for startups.

Investing in anything that takes an investor out of his comfort zone is worth it, because it leads to those crazy ideas that can change the world. However, it should be noted that it is those successful ideas that were never considered good in the beginning.

Jurvetson said that if an idea is strongly supported by a few number of people who believe it to be the future of the world, but the majority is against it, then it is a good sign.

 

Respect for the Team rather than Individual

Another factor he looks for is a founder who has respect for the team rather than individuals at work, a trait that contradicts the cult of a one man (in this case, a CEO) running the show. Having the self-confidence to stay humble about the proposals made and respecting the team are some of the additional attributes of a good startup owner.

 

What Sectors to Invest?

When talking about what sectors should venture capitalists invest in, Jurvetson hinted to Moore’s law as to how it’s penetrating into different sectors and turning lousy, low margin businesses into innovative software based businesses. Tesla is a great example that changed the course of different industries. Its contribution in the Planet labs, SpaceX, or automobile industry is a prominent example of the transitions made.

It took decades for these sectors to see entrants who transformed these industries through product enhancement. A number of investments failed during the process, yet, they are all IT based now and have gone through a massive transformation. Innovation has brought so many changes in the IT sector. For example, application of machine learning was considered a geeky subject a few years ago and only a few people at Google and other companies that worked on image recognition were familiar with the concept. But these techniques will now be widely recognized in every industry as they represent a new way of doing engineering.

 

A Way Forward

Remember, it is a two-way street. The world will experience the breakthroughs only if big companies welcome the evolution of technology. Jurvetson said that large companies that embraced innovation were the most exciting ones. A good example of this is Apple and its achievements over the years. Most of the large companies do not welcome meaningful innovations, which represent a connotation of disruption to depict the change. Embracing the change doesn’t mean a mere 10 percent improvement in processes, it shows a wow factor, such as freeing the automobile sector from gasoline consumption.

Similarly, back in the days, going to space was considered a tough job. Only a fighter pilot could qualify for a space mission with lots of training. But it is not going to be the same in future. SpaceX will soon launch a robot spacecraft where an astronaut will sit back and take a ride on the spacecraft. If the company is successful in doing that, space flights will become as frequent as air flights providing the same level of safety and fun.

Therefore, for a new idea to be successful, investors will have to support the change and big companies should embrace it. Not only will it be beneficial for a global economy, but will also make room for game-changing breakthroughs.