Thread by @Julian

I want to explain why venture capitalists give 21 year olds $30,000,000 to pursue startup ideas.

What's going through their heads?

What specifically are investors looking for today?

Here's how I've seen VCs' minds work after 4 years:

For context, most of my day is spent intro'ing founders to investors:

• I run a seed fund: Julian.capital
• I built VCSheet.com (free) to help founders find VCs
• I run SeedChecks.com for founders to meet well-known angels

I'm writing this thread because many founders are struggling to understand why VCs aren't interested in their startups.

The first thing founders should know:

Most seed VCs want startups that they think can reach a $1B+ valuation. Their investing lens mostly revolves around that outcome.

I'll show you how to help convince VCs of a $1B pathway.

But, first, why $1B?

Because it's often needed to make VC portfolio math work:

Let's say a VC fund makes 20x $1M investments.

Say 19 startups go to 0, and 1 goes from a $15M valuation to a $1B exit.

Account for 60% share dilution from future rounds, and the return is $26M for the fund. So a single $1B outcome gives a 1.3x return on the fund.

Over, say, a fourteen year lifespan for a fund, a 1.3x isn't that great.

So VCs are hoping for more than "just" a $1B+ outcome. And they want multiple such exits.

In short: Seed VCs play the odds—they know most of their investments will die. So they have to swing big.

(In reality: It's more common to see, say, 12 startups go to zero, 7 return 1.5-4x the initial investment, and potentially one return a lot. But I'm keeping the math simple.)

So, how does a startup reach $1B?

Typically, you need enough revenue multiplied by your sector's average valuation multiple. This revenue-to-valuation multiple varies by competition, trends, and time.

For example, you might have a $40M revenue business, but if you're selling shoes, you're therefore a D2C startup, which has lower multiples than SaaS. So with, say, a 4x multiple, you're "only" worth $160M.

You can study startup valuations to learn how your sector is trending.

Here's another valuation scenario:

If a public company similar to you earns $100M/yr and has a market cap of $1B (a 10x multiple), VCs assess whether you could earn $100M/yr too. If so, and if you have great growth, perhaps you could reach $1B.

But $100M/yr is a high threshold.

Few companies in history have reached that.

And this is why most startups *aren't* actually a fit for traditional, big-swing VC.

What are the alternatives? Alt VCs that invest for smaller returns. But there aren't many of those. Or, raise from friends and family.

But, what I think more people should do:

Run your startup as a bootstrapped lifestyle business. This is so much better than VC pressure for most founders. (I'll get back to this shortly.)

Anyway, back to how to convince VCs you can be worth $1B.

You have to be so compelling that they believe you're in the top, say, 0.5% of startups they've ever seen with the potential to reach $1B.

Here's what some VCs often look for.

Depending on the investor's style, they may index either on your startup's *market pull* or *team quality* (if not both).

What's market pull?

It's the condition where your startup is so compelling at its price point that the market pulls it out of your hands the moment it learns of it.

In contrast, there's (bad) market "push:" where you have to slog to convince people of your product's ROI—as it's not self-evident.

Here's the good news:

At seed, it's okay if you don't have market pull yet.

Because VCs often invest on the belief that market pull will materialize in the near future.

Meaning, most are okay with betting on where the world is going.

Four factors may cause market pull to emerge:

1. Consumer behavior changes (eg. keto becomes trendy)
2. Regulatory changes (eg. weed is legal)
3. Technological innovation (eg. cheaper batteries)
4. New distribution channels (eg. TikTok)

VCs are trying to predict these trends.

Our first takeaway for pitch decks: If you don't have market pull yet, your pitch should explain why trends will produce market pull in the future.

VCs don't mind waiting for pull because if an idea looks weak today but great in the future...

Then the future's value won't be fully priced into the startup's valuation, and VCs can invest in you at a lower valuation.

This is often critical. Most seed VCs care a lot about valuation.

The lower the valuation, the more the VC makes at your $1B+ exit.

It's about multiples returned on the dollar. If they get in low enough, they don't need a $1B exit. A $300M exit could still return their fund if they invested low enough.

This is why VCs might be much more likely to invest in you at $10M than $25M.

Note that in a few tweets from now it may look like this thread is done, but it's not—we're only 1/3rd through—so soon you may need to click "View more replies" or something to keep reading till the end. (Not sure why Twitter does this...)

Anyway, back to market pull. It's worth repeating: de-risking present or future market pull is critical.

In fact, many investors are tolerant of product and team risk, but have very little appetite for market risk.

Why? Whereas product and team can be iterated on over time, market risk is a brick wall when no one wants you.

Here's a thought exercise for assessing market pull:

1. Find 100 potential customers that are representative of your total audience.

2. Ask each to rank your startup idea out of 10 on how likely they are to pay a cash deposit to use it.

3. Count the percentage of respondents who say 9 or 10.

In my experience, only 9s and 10s matter. Don’t be misled by 7s and 8s—these aren't high enough to confirm conviction.

4. Consider the percentage of respondents who say 9 and 10 as a proxy for how much of your total audience you could convert.

Be realistic about audience size.

5. See if you can get those 9s and 10s to actually pay a deposit. If so, you're onto something.

6. Rinse and repeat for each idea you're considering.

This is simplified, but it's quite useful during startup ideation.

I list the types of businesses most likely to experience market pull below:

julian.com/guide/startup/…

Market pull aside, some VCs index much more on team quality than market pull. (But they want both to be compelling.)

Often, assessing a team comes down to diligencing whether the founders are forces of nature.

Here are the criteria some VCs look for in founders:

1. Founder-market fit: Are the founders adept at the skills and customer empathy needed to make this idea succeed? For example:

A. If this is a consumer startup, the founders may need strong product and UX sensibilities.

B. If they’re B2B, they should be able to hustle through an enterprise sales slog.

C. If they’re govtech, they should intimately know the sales process and possess a strong rolodex.

Next criterion for assessing strong founders:

2. Are they premeditative?

Premeditative means they strategically think through decisions instead of YOLOing. They don't impulsively run at full speed without studying first.

For example, do they know why historical attempts at their startup idea failed, what the learnings were, and where the landscape might go?

Next.

3. Bias toward action: When the best decision is clear to the founders, do they pursue it without needlessly deferring?

4. Do the founders think and express themselves clearly?

5. Can the founders excite others to join the journey? Can they "sell?"

VCs assess most of these by talking to you across 2-4 calls and doing references. They pick up on cues as this is most of what they do all day.

I've seen VCs take bets on amazing founders who have mediocre, low-market-pull ideas with the assumption that the founders are so good that they'll infinitely pivot their way to success.

To each their own!

Let's recap where we are so far:

• Many VCs look for $1B+ outcomes. The lower the valuation, the better it is for them.

• Many VCs build confidence in that outcome by focusing on market pull and force-of-nature founders.

Convey these two points in your pitch.

My 2c: Do not end a pitch call without doing everything you can to reassure investors of those two considerations.

Don't trust them to ask the right questions that let you talk about these points. Many are lazily just checking boxes.

Take control and impress them.

That said, even if you nail these factors, you're still likely to be rejected by most VCs.

Why is that? Why do VCs pass on so many good, $1B+ potential deals?

It's often for two reasons—that they may not be direct with you about:

1. They're not motivated to do the research to learn your space well.

2. They don't think you're formidable enough—especially in light of your competition.

Here's what I mean:

1. VCs are often too lazy or time-poor to learn about you.

Many VCs simply don't know your space well and won't feel like spending their time learning it. VCs (who aren't impulsive) feel that they must know your space well enough to build confidence that you're the best bet.

Instead of telling you this, they'll often ghost you or point to another excuse.

This is why VCSheet.com is so important (and free). It shows you which VCs invest in your sectors so you waste less time pitching. It's built by @RohdeAli + @matvogels.

VCSheet.com also shows you VCs' publicly-available email addresses.

However, if you do pitch really well, you can absolutely get VCs who don't know your space (and aren't constrained to invest in certain spaces) to drop what they're doing and learn everything.

Personally, I LOVE when this happens: using an amazing pitch as an excuse for me to learn a space well. That's a big part of why I love investing.

Next, another low-key reason VCs pass: their concern over your competition.

With competition, VCs fear that others are better than you or that tangential companies will line-extend into your space and suffocate you.

This could be reasonable in markets where there isn't enough room for many big winners—because there isn't enough market demand to split.

Or maybe the market is huge but they're concerned that other startups' monopolistic network effects will crowd you out.

VCs sometimes don't tell you this reason for passing because it may imply that you're not as good as you think you are.

And they want to avoid saying that.

Fortunately, VCs are quite tolerant of old incumbent competitors—more so than competition from young and hungry startups.

They know that old companies often can’t compete with the speed, iteration, brand, and adaptability of startups.

Regardless, this is why you should touch on the competitive landscape in your pitch.

Here's how. I've seen three counter-positioning techniques:

1. Do something no one else is—and get a big head start
2. Do something incumbents cannot do
3. Be force-of-nature, top 0.1% founders

For many VCs, you must convince them of at least one of those three factors in your pitch.

Let me explain:

1. Do something no one else is.

Doing something hard that'll take other startups 2 years to replicate gives you a head start to take over the minds and hearts of customers—and let network plus lock-in effects kick in.

Factors that may provide you with a head start: proprietary data, technological innovation, early regulatory approval, and more.

Here's another counter-positioning approach:

2. Do something the incumbent cannot.

For example, Google’s Android operating system is open.

This is the opposite of iOS, which Apple keeps closed.

As a result, Android carved out the entire non-iOS market for phone manufacturers.

Another example of doing what the incumbent cannot is livekindred.com (I invested). They're a competitor to Airbnb that does something Airbnb likely wouldn't:

Whereas Airbnb charges nightly fees, Kindred charges a low annual fee then makes nightly stays nearly free.

They do this by having members swap home stays with each other.

Airbnb is unlikely to replicate Kindred because doing so would annihilate the revenue model sustaining their massive market cap.

VCs look for many other factors when investing, and certainly not all VCs invest the same way, but I'll touch on one last factor that I care about:

How you acquire users at scale.

As a marketer, this is where most founders I meet are the weakest—and where you can stand out.

In your pitch, explain what your scalable acquisition edge is.

One of the most compelling answers is walking through how you leverage product-led acquisition (PLA). To explain PLA, I got a quiz for you:

Which of the following channels is best for acquiring users?

Google Search · Instagram · Facebook · Quora · Amazon · Google Display · App Store · Pinterest · Snapchat · YouTube · Bing · LinkedIn · Affiliates · Influencers · Direct mail · Physical ads · SEO · UGC...

· Network effects · Thought leadership content · Referrals · Sales · Aggregators (e.g. Reddit) · Product-led acquisition · Speaking and events · PR · TV · Print · Radio · Community

The answer is… whichever cost-effectively scales for your startup 😂

But, frequently, the best is product-led acquisition.

PLA is when users naturally invite others while using your product.

For example, when you join Slack, you naturally invite your teammates and contractors so you can talk with them more easily.

By doing so, you’re growing Slack’s user base *for them*—sparing Slack the need to spend money on ads.

Or, when you Venmo, Cash App, or PayPal someone money who doesn’t yet have an account on the app, there’s no way they won’t create an account to claim the $1,000 you’re sending them.

Once again, you’re growing Venmo and Paypal for them by naturally encouraging others to sign up.

Many major tech startups of the last decade grew largely via PLA. Dropbox, Slack, Facebook, PayPal, Uber, Snapchat, Zoom, and more relied on *users inviting others.*

Y Combinator's Paul Graham phrased it like this:

"Don't start a startup where you need to go through someone else to get users."

Below, I explain the different types of PLA plus how to integrate them into your startup:

julian.com/guide/startup/…

Now, I'm not saying you must grow via PLA, but I am saying it's one of the best ways to grow and *it's one that VCs like because of its implied network effects and lack of reliance on third parties.*

That's why I bring it up. VCs, for good reason, love it.

Before I wrap, I want to dispel the myth that it's critical you have a warm intro when meeting VCs.

Warm intros are better, yes, but they're not necessary.

Most VCs I know DO look at their incoming cold emails and skim them.

Yes, they pass on the vast majority without much consideration, but many do skim to see if anything stands out.

Because most funds, especially small ones, are not as flooded with deals as you'd think. And good VCs are open-minded and hungry.

This is why I suggest using VCSheet.com to find all the VCs who actually invest in your space. As mentioned, it's free.

Further, we built SeedChecks.com where you can submit your deck to 16+ well-known investors. There's no program to attend. No catch.

The vast majority of Seed Checks submissions won't get an intro, and now you know why: for all the reasons I've explained, VCs pass on the vast majority of deals, including many great ones.

It doesn't mean your idea isn't good.

To recap this post, for VCs to have conviction you'll be worth $1B+, many I know look for:

• Force of nature founders
• Market pull/timing
• TAM/business model
• Competitive landscape + counter-positioning
• Customer acquisition strategy

Now here's the billion dollar question.

Is doing all this worth it? Should you raise VC?

In my opinion: no, not for most startups.

I believe that running a lifestyle business is a better option for most.

Raise a bit from friends and family to control your destiny, cash out when you want, and avoid the rat race.

VC is for founders who want to scale as big as possible and take over a part of the world.

Is that what you want to do?

If so, I'll namedrop a few investors who founders have told me are awesome, helpful, and caring:

Josh Buckley: @joshbuckley
Vanessa Larco: @veelarco
Jack Altman: @jaltma
Lachy Groom: @lachygroom
Jenny Fielding: @jefielding