In the middle of a recent startup pitch competition, someone asked me this probing question👇.

“What is the one thing that you are looking for in these startups when you are investing?”

The person asking the question was incredibly bright and worked for one of the big tech companies. And yet, completely unknowledgeable about how venture investors made decisions.

In that moment, I had a flashback. ⏰

First, I immediately got taken back to seven years ago when I was a former founder. At that time, I held a much more unexperienced view of startups and venture capital.

Back then, when I had just started my FinTech startup, I didn’t understand how venture investors made decisions on who to invest in and who to pass on.

Because I didn’t understand it, investor decisions seemed to be, at a minimum, incredibly subjective (spoiler alert 🚨: they are 😉 ). But my lowest moments, I felt like an investor passed on my company because they held a grudge against me (spoiler alert 🚨: I can attest that, as an investor, this is never the case for me). Nothing that investors did seemed to make sense to me.

Sitting in that moment at the pitch competition, when I came back from my flashback, I thought for a minute before answering.

“It’s not just one thing. It’s more like a matrix of things,” I responded.

Furthermore, the boxes of the matrix do not hold the same weight.

Another way to think about this is the following:

✅ Venture investing is like an expression of dependent variables, with particular variables holding more dependency between each other and overall weight than others from startup to startup. ✅

✅ This is the “Venture Investing Expression” on a first meeting conversation:

Depth of market problem ∝ solution fit ∝ non-obvious insight ∝ traction ∝ business model ∝ market size ∝ go-to-market strategy ∝ team execution potential ∝ status of fundraise ∝ use of funds & milestones ∝ valuation ∝ stage of business ✅

where ∝ means “in proportion to”

👉 The expression needs to net out to a winning score in order for the investor to move the startup through the investors’ process. 👈

Furthermore, the #1 asset and edge that investors have is an extremely high amount of startup inputs. Startup founders are running one company. Investors could talk to 20 companies in one week and are drawing insights across all of them.

This level of learning velocity allows investors to compare strategies and tactics of one company versus the strategies tactics with another. 

If founders could enter the investor cockpit, one would get a bird’s eye view of companies that win and companies that don’t win. That is exactly how investors are able to do a 360 degree sweep of the business and make a decision after a 30 minute call.

Let’s apply this. Pretend that you are an investor 💸. On a Tuesday, you talk to the two below startups: 👇

At 9:01 a.m. 🕘 you meet a startup in the FinTech space. The team is superb. They come from the industry and the CEO has faced the problem herself. They are attacking a big problem with an intriguing but they have unproven non-obvious insight into the market. You as the investor meet the startup at essentially whiteboard stage. It is pre-product and the CEO is looking to bring on a tech lead for half cash/ half equity to build out an MVP with an ETA of going live of 1.5 months out. 

At 1:30 p.m. 🕜 that same day, you talk to an AI startup in the manufacturing space that has a product built and is live on seven customer sites. The current traction is $6,000 in MRR. The CEO comes off as a bit of an intellectual without much bench strength related to operations and marketing on the executive team. You discover that the CEO essentially pulled his existing network to get those 7 customers, which means that they haven’t yet executed a true go-to-market motion at scale with success. They have raised a pre-seed round. For their seed round in consideration, the valuation that the CEO is vocal and is seeking is higher that is way above what the market will bear. No investor has issued a term sheet yet. Thus, you don’t know if once a term sheet is on the table, the valuation will be in line with your thinking or not. Also, since no true go-to-market motion has been executed yet, you try to envision scenarios what what will happen when the customer acquisition goes beyond the CEOs network into an executable go-to-market engine dependent on the right messaging, the right channel, and the right audience? 

As you can see, venture investing follows the expression of dependent variables and is also very subjective. Furthermore, every investor writes their own evaluation of this. Other investors will look at the same expression that I look at and either add their own dependent variables or subtract or deem irrelevant some of the items that I consider important.

There are certainly other expressions for additional layers of questioning and diligence, getting into topics such as defensibility, cap table management, fundraising risk, and many other pieces.

✅ The “X” factor in the expression is whether the dependent variables that are weaker can be coached or advised into a higher likelihood of winning, and whether they cannot. ✅

Secondly, investors themselves also need to consider fit with their firm’s thesis and expertise, which is independent to anything about the startup.

For Tundra Angels to determine fit, this express goes something like:

member/investor expertise relative to the problem space ∝ potential network connections we could bring from myself and our individual investors ∝ fit with a breadth of the investment thesis of our members.

In short, when an investor meets a startup, it’s all about the dependency and relationship of these variables at the snapshot in time that determines the next step.

Time is most often on the investors’ side, rather than on the side of the startup. The major exception being in cases of investor FOMO when a round is coming together quickly.

✅ Because venture investors benefit from a high amount of startup inputs, if the “Venture Investing Expression” does not net out to be positive, passing and letting the startup have more time to play out is the investors’ best hedge against making a bad decision. ✅