January 27, 2014

Six Things Venture Capitalists Look for in an Entrepreneur

NIN Ventures (or NIN.VC), an early stage Venture Capital firm, sponsored the Harvard Business School Private Equity and Venture Capital Group of Chicago’s “Pre-Holiday Bash!” on November 21st. The event was at Bentley Gold Coast and featured several panelists who discussed the question “Is it the Car or the Driver?” from the Private Equity and Venture Capital perspective.

Nin Desai (CEO, NIN Ventures), who led the discussion, was joined by co-panelists Matt Moog (Founder and CEO, Wavetable Labs) and Mark Koulogeorge (Managing Partner, MK Capital). The panelists shared their unique experiences in the technology, venture capital, and private equity space. They went on to debate the importance of the entrepreneur (the driver) versus the significance of the core business idea (the car) from a stage and sector perspective. At the end of the evening, the general consensus was that the entrepreneur was more important to the overall performance of the company. So how do venture capitalists identify great entrepreneurs when they examine potential portfolio companies?

It is often believed that the single most important thing that venture capitalists look for in an entrepreneur is “passion”. How much does the entrepreneur love the idea? Does the entrepreneur truly care about the underlying problem they are attempting to solve with their business opportunity or merely looking to cash out for quick profit? While passion is an important trait that VCs indeed look for in an entrepreneur, here are six things we think may be more important:

1. BIG DREAM! - Venture capitalists look for big ideas that are scalable with the leverage they provide in the form of funding, domain expertise, and managerial experience. A new and innovative small business may be extremely profitable for its founders, however, VCs need to see massive growth potential in order to invest. They love entrepreneurs who dare to dream big!

2. Personality Traits - Along with a big dream, VCs look for individuals with focus, tenacity, hard work, and persistence. How hard and long will this person work to make the company (and dream) a success? The most important quality a VC looks for in an entrepreneur is they must be a good individual and ethical person. A socially responsible business and mindset is very attractive to VCs.

3. Expertise & Experience - What does this entrepreneur know that the industry expert doesn’t? Specialized knowledge is just as powerful as an innovative product when it comes to a sustainable competitive advantage. Also, how well does the the value of that expertise translate across to other companies that the VC is associated with? For example, a VC may invest in a company to gain access to superstar programmers they can then add to their network when the need arises to develop other companies within the VC’s portfolio. Or, perhaps, the management team of a potential portfolio company has successfully developed and executed a strategy to enter a specific foreign market. That experience could be invaluable to other companies the VC is connected to.

4. Choices - Entrepreneurship can be seen as a series of choices made by a company and its founders. VCs like to look at some of the key choices made by entrepreneurs when evaluating whether or not to invest in the company. How did the entrepreneur chose the management team? Strong managers hire well to address strategic areas of a growing company’s needs. They set aside ego and look for people who are better than themselves in some identifiable way. There is nothing like a single, “perfect” entrepreneur that could handle any given situation. However, there are strong teams that come awfully close. Also, how have they used their limited resources up until now? Have they burned through cash like there was no tomorrow in the hopes of finding more, or have they deliberately managed cash flow in ways that directly influenced positive growth?

5. Communication - VCs like entrepreneurs who can effectively communicate. It may be their ability to summarize complex code or algorithms into terms understandable to a non-expert. More often though, it is the case that VCs want to work with entrepreneurs who can be extremely candid about problems they are currently facing and potential bottlenecks in the future. Save the sugar coating for the PR team. VCs need an entrepreneur to call a spade a spade - as quickly as identifiable. No surprises. Entrepreneurs who are forthright about issues allow the VCs to adjust expectations or to step up with an insightful solution.

6. Flexibility - While steadiness of vision is important to keep a growing company on track, changing circumstances may require an entrepreneur to deviate from their initial business strategy. These inflection points really show the adaptability of an entrepreneur and how success is not always defined by moving in the same direction regardless of external circumstances. The risk here though, is that the entrepreneur is TOO adaptable which may be an indication another thing that VC’s look for is missing: passion…