Mind the gap - how VCs and operators think

I recently joined Forward Partners as an Investment Associate making the jump from startups to VC via an MBA. After a few months on the other side of the fence, I wrote down a few thoughts on how VCs think differently to the founders we speak to in the hope of helping to close the expectations gap.

Short-term vs Long-term vision

It’s no secret that VCs need a few big hitters in the portfolio to make their fund economics work so we’re usually on the lookout for potential “fund returners” (i.e. a single investment that will return to us the entire value of the fund on exit). Similarly, working at startups, I always loved having an ambitious long term vision as the guiding light and feeling like you may be about to change the world in some small way.

Whilst the VC investment case requires a big long-term vision, it’s usually cemented on a clear short-term roadmap. Investments succeed or fail based on the products that you can get to scale in the first place. Relying on developing machine learning algorithms two years down the line or a global expansion in the future won’t cut it if your business can’t survive the next two years and show enough traction to raise its next round. Resisting the temptation to oversell the long-term is important. We like to know who you’re selling to next week, not just in 5 years, so identifying beachhead markets and those in immediate need of your product is key. Bringing it all together to show how you plan to bridge the gap between the two visions through growth is the key to getting buy-in.

Testing vs Guessing

One of the things that drew me to pre-seed investing is risk; it’s one of the riskiest areas of one of the riskiest asset classes and it’s difficult to consistently turn that risk into reward. But I’ve quickly learnt that VCs are investors, not gamblers, and eliminate as much risk as is possible at this early stage. We use data to form hypotheses on markets, trends, problems, behaviours & products, and when we see a startup that combines an interesting and well-validated hypothesis with a large target market and talented founders at the right time, we back them.

One of the more common flaws in pitches I see is founders who have clearly identified a problem and started building a product to solve that problem without fully understanding the market. We love to see founders who think “market” before they think “product”. Understanding the participants in a market as well as their differing behaviours and needs helps to inform a well-curated product roadmap. Ideally, we like to see a variety of different personas - not just those who want your problem solves but also those who face the problem and don’t think it’s a big deal or who are using other solutions. That helps to give founders a great picture of the market as a whole.

Iterating and failing fast is an important part of any product journey but we want to see it being done methodically and deliberately for market participants rather than throwing mud at a wall and seeing what sticks. When it comes to investment, it’s reassuring to see teams present hypotheses to be tested rather than working it out as they go. This sort of challenge is particularly prevalent in multi-sided consumer marketplaces where different participants can have very different needs.


Exitability vs returns

Operators often dedicate a slide in their deck to potential exit routes in the future. As I mentioned, for VCs each investment has to have the potential to be a fund returner. For a £50m fund with a 10% stake in a company, that means a £500m exit. In practice, the type of exit isn’t too big a concern at early-stage - it’s useful to see the level of transaction activity but the potential for the startup to get to fund returner size is much more important for us.

That potential usually comes out through market sizings. The most helpful market sizings are those that take a bottom-up approach based on target customer demographics, number of target customers in target geographies and how much customers will spend per year on average. All of this is open to change and difficult to predict but we can test the inputs and get a much clearer picture of a startup’s potential ARR at scale this way. It’s much easier than just being told the grocery market is worth £200bn globally - we like to know how you’ll extract value from the market.

The very best market sizing slides may even use ARR valuation multiples to backsolve from a future exit valuation to show the path needed to get to fund returner scale.

Short-term vs long-term ability to win

Black swan events like the disruption caused by Covid-19 or the 2007/8 economic crisis present a lot of opportunity for innovation. Often such events lead to startups urgently looking to raise to capital on a shift in market sentiment or customer behaviour. As a VC, we acknowledge the prevailing conditions in a market but we always take a long-term perspective. We look for long-term ability to win and long-term defensibility for your business. Market events may provide the right time to launch but it’s not always a recipe for ongoing competitive advantage. We like to understand the long-term implications of a short-term event so it’s helpful to understand not just why the time is right now but why you’ll still be winning in 5 years when Covid-19 is long gone (fingers crossed!).

Strategy & execution

Paradoxically there can be conflicts in the right strategy for the business and the right strategy for raising money.

One of the dangers in early B2B Saas businesses that I’ve experienced firsthand is winning enterprise customers too early. Enterprises are notoriously demanding customers that can be a real strain on resources which may affect your ability to serve the wider market and therefore validate product/market fit. They also often require bespoke features which aren’t always scalable. Mark Suster’s 2009 blog on rabbits, deer & elephants articulates the problem of neglecting others to serve the elephants very well.

In consumer product businesses there are similar anecdotes around startups struggling to raise money after choosing to go down the supermarket route. Taking upfront cash and quick access to consumers is understandable but also means foregoing the customer & channel data that a D2C strategy gives you - and which are vital metrics for VCs to understand your business.

Both scenarios described above are cash generative and offer serious product validation - as a founder, they’d be very tempting and indeed may be the right choices. Paradoxically, however, they may not be the strategic execution that VCs want to see if you’re looking to raise VC money. We’re laser focused on a long-term strategy and reaching scalability and, in a resource-constrained startup, both the above scenarios could limit your ability to prove market demand as other GTM strategies may.


Expertise vs hustle

Andrew Chen once tweeted that at Pre-seed you back a founder, at Seed you back a team, at Series A you back product/market fit, at Series B it’s scalability and at Series C it’s unit economics. As with any maxim, it’s not perfect but the crux of it holds true - at early stages, the founding team is a key pillar for any investment case.

Startup side, we often looked for smart people who could wear many hats, solve problems and help the company to scale quickly. Industriousness was a highly valued attribute - we liked hustlers who wouldn’t shy away from difficult tasks.

All the above applies on the VC side too but we also like to see domain expertise in founding teams; founders who know their markets and problems back to front, especially in complex or regulated sectors. Expertise can arise from a variety of sources - it doesn’t have to be years in industry. It can come through research, user interviews, your network or analogous experience. Applying ambition to go beyond a high-level problem, really understand their markets and validate their idea is great to see.

Urgency vs caution

Startups commonly need cash yesterday for their growth plans. Expanding the team, building out product and sales & marketing are all costly activities. VCs also love to see fast growth but conversely, the longer we wait to invest the more data there is to de-risk an investment. Waiting a week to commit is one week closer to customers moving down the sales pipeline or assessing the outcome of a new marketing channel and it’s hard to find the balance between moving fast and moving cautiously.

This is one we do well at Forward - we aim to get to terms within 30 days of meeting a founder for the first time. Equally there are times when we have to wait weeks or months because we can’t build enough conviction around a certain aspect of the business. Occasionally, that does mean missing out on good deals but we have strict investment criteria that we stick to and we’ll always try to be as clear as possible on what it is we’re waiting to see in the data.


Sometimes you can tick all the boxes but ultimately, availability of capital and resource can be a constraining factor. VCs face limitations like any other business. Small investment teams, high dealflow and investment strategies mean that sometimes the timing just isn’t right even if everything else is. Startup side, we often saw fundraising as more of a point-in-time solution that came around every 18 months or so when cash was needed.

It’s worth remembering that securing funding is difficult - the best way to avoid anything getting in the way is to start early, build relationships with investors, keep them updated with regular emails on progress and make sure that both sides are aligned before the process starts.

And for everything else there’s always The Path Forward or you can just drop me an email at tom@forwardpartners.com and I’m happy to answer any questions you may have.

Tom is an Investment Associate with Forward Partners. He joined us after completing his MBA at Cambridge University. Prior to his MBA he was Country Manager for Spain at Leverton, an Applied AI startup in the legaltech space and has also previously worked at Cybersecurity Saas firm Mimecast. He started his career in Corporate Finance at Deloitte where he qualified as a chartered accountant.

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