Entrepreneurs tend to think investors are too arbitrary in the ways they make their investment decisions. Or rather, that’s how I often felt after being rejected by a VC I was sure would love my pitch. “They just don’t get it,” I’d tell myself when VCs didn’t offer a term sheet. “But I’ll show them! I can’t wait to make them feel like idiots when my company becomes an enormous success.”
In the end, of course, I was the idiot, and they were right not to invest. But how did they know? I was always so sure I was on the cusp of having a billion-dollar gold mine, they were equally sure I wasn’t, but they were always right and I was always wrong. How?
The answer turns out to be pattern recognition. Now that I’m a couple decades into my entrepreneurial journey and have met thousands of entrepreneurs, identifying the founders who seem like good investments is surprisingly easy (and I’m usually right). I assume most venture capitalists are in a similar position. They meet thousands of entrepreneurs, recognize the patterns, and that’s how they make their investment decisions.
I’m going to explain what signals investors are looking for when trying to find successful entrepreneurs and how it impacts which founders they ultimately fund. But before I do that, allow me the following caveat:
Recognizing founders worth investing in and which companies ultimately get funded are two different things. What I’m describing here is the ability to detect which founders have clear potential to launch successful startups eventually. I don’t mean these founders will immediately get funded, and I don’t mean they’ll definitely build successful companies. I just mean people who’ve worked closely with lots of startups can meet entrepreneurs and know within minutes which ones have “it” — whatever “it” might mean — and which ones don’t.
How people use this information is, of course, up to them. In fact, I suppose the usage aspect of this knowledge is where I diverge from venture capitalists. VCs use their knowledge to make investment decisions. In contrast, I…