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What do venture capitalists look for in entrepreneurs?

As a follow-up to my last column “Is there still money to be made as an analog entrepreneur?” (click here), I wanted to expand on the startup theme and discuss what the investors are using to evaluate potentials deals. These factors usually fall into two categories: experience , and individual characteristics .

In the area of experience , first and foremost is the track record of the founding team. Having a successful exit or two brings instant credibility. The investors will look for achievements in each individual's background, as well as achievements in the specific industry.

Market knowledge is also a very important because, even though most investors have established relationships that allow them to do due diligence, they believe that a knowledge of the market is critical to achieve a desired outcome.

Reputation of the founders is another key component in evaluating the story. They want trustworthy people. They are about to give a great deal of money to a business run by an entrepreneur, and they want to be sure the manager of that business has a reputation in our industry that is outstanding. This does not mean, however, that an occasional “bad apple” does not slide thru the cracks!

Leadership is also very important because someone has to run the business and the team. We see, time and again, examples of startups where the founders are replaced at some point. This is not something they relish, but on the other hand it does not indicate that any of these affected are blacklisted or labeled as failures. There are many reasons that changes are made.

When we look at the individual characteristics , there are six prime areas that are considered: The first is personalities . More often than not, the investor will invest in entrepreneurs that have a similar personality to themselves. After all, they are going to be spending a great deal of time in helping the team build a successful company and it doesn't make sense to pick a group of people that they will ultimately not get along with!

The second criterion that VCs will also look at is the staying power of the team. Most would agree that 90% of every venture success would come from perspiration, and not from inspiration! They also know that the management and engineering team will have to put in very long hours to compensate for the lack of employees and limited resources.

The ability to recruit the team is also a very important element that is considered when evaluating potential investments. Since this is my business, I can say without hesitation that it will probably become the biggest challenge for the new company, and may well far outweigh the technological challenge itself. Being able to show your ability to bring talented people to the team will greatly enhance your position with potential investors.

The fourth criteria is the ability to handle risk , and who has the intellectual power to evaluate risk Every one of our startups in the last seven to eight years has endured many twists and turns in their companies evolution and, simply put, the early years are the most traumatic. A solid management team must be capable of analyzing situations, evaluating the probability of success and be able to implement a plan. In this regard, we do know that the market can shift in a very short period of time and create havoc.

Communications skills are the fifth criteria. VCs are looking for people that can communicate their ideas clearly and effectively, not only to the potential investor, but to customers as well. The ability of the management team to convince the employees to work those required long hours is also essential. It is this verbal ability that separates good managers from technical inventors.

Finally, a detail orientation is a trait that investors find to have substantial value. Most of us probably think that entrepreneurs are good at looking at the big picture, while letting others handles the little details. Details not only involve numbers, but also involve driving a product from inception to real production ramp. The management team has to have the ability to maneuver through many mine fields to remain on track.

About the Author

Gary Fowler is President and Founder of Analog Solutions, a Professional Recruiting firm, devoted to the analog and mixed-signal space. He has over 25 years of experience as an Executive Recruiter. His clients over the years have included several Fortune 500 companies as well as many emerging, well funded startups. In addition, he has relationships with several leading Venture Capitalists and Investment Bankers, who serve the analog semiconductor industry. He holds a BS in Human Resources Management from NYU, and MS in Management Science from SUNY Binghamton.

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