The tech media is littered with the success stories of companies who got funded by the finest VC's in the valley, but the truth is that under 5000 companies raised VC in 2014. It's hard to say exactly how many, but I think we can be reasonably confident that most people who apply for venture capital do not succeed. YCombinator as an example has historically rejected more than 95% of their applicants. At the same time, in a recent conversation I had with a VC partner he lamented how much he wished that they could find more quality companies to fund. YCombinator has also stated in the past that they have no acceptance quota and literally take as many companies as they can find that they feel are up to snuff. The point I'm trying to make is that perceived quality, not supply of available money is what stops more companies from being funded. VC's have a responsibility to their investors. This means they can only invest in companies that pass their due diligence, and even knowing that most companies fail to meet the quality bar. Why is this? I can only anecdotally say that most people who work in the tech industry have a very poor understanding of how VC's operate and this makes it hard for them to understand the perspective of these VC's.
One thing I've found that I can do to better understand what VC's are going through is to do a little homework assignment: Put myself in their shoes. Assume VC firms are just made up of people who are making rational decisions for their investors. What indicators would I use if I were going to invest some money in several early stage companies?
In no particular order just off the top of my head, here is my list:
1. Do the founders seem committed to this or might they just give up if things don't go well next week?
2. Do the founders seem competent?
3. Does the idea seem plausible?
4. Is the idea one that could generate a lot of money and thus an ROI?
5. Are the founders resourceful?
6. How much do I trust the founders? This is where a strong reference really helps.
7. Has the company demonstrated any traction in their market?
Not too surprisingly this matches pretty closely with what VC's are generally understood to be looking for. I've most certainly read about these details time and time again, but it never really clicked for me until I put myself in their place and wrote it out in my own words. If you have a few minutes to spare, give it a try yourself. What indicators would you use to choose who to invest in? With this knowledge how can you now present yourself as someone that a VC would want to invest in?