What I Look For in Early Stage Companies
A lot of cool stuff happens in the garage.
If you ask, I bet you any and every tech VC will tell you their own individual thesis on what they look for in early stage companies, but often times they won’t tell you how they weight those elements against a go/no-go decision on an investment.
It’s entirely possible that some of them don’t have an opinion on what the most important element of a deal is, and I can tell from experience in raising early stage money, that many venture capitalists think of core elements in a very binary way.
Most of them will tell you the same thing - it comes down to some iteration of “The three Ts” …
Team.
Traction.
Technology.
IE “Are the people smart and capable”, “Do customers want this?” and “Is the tech defensible?”
Because I am not a partner at a massive firm who has to find at least 4 sizable deals per quarter, I have the luxury of making more granular decisions about the companies we invest in at Baker Hall.
That said, while I do follow the broad rule of three Ts, I like to be super early in interesting deals, so I end up looking at a lot of really weird and interesting stuff.
Let’s talk about the criteria…
Team
A lot of entrepreneurs in the technology sector have the really bad habit of believing some version of “my tech is superior and nothing else matters.”
I know this, because I’ve been this person before. It’s easy to do, really. When I have historically created some piece of technology that does exactly what I envisioned it would - that’s a great, accomplished feeling.
There is however, a massive difference between “it works!” and a completely functional company that is operating and selling tens or hundreds of millions of dollars worth of it. In other words, “it takes a village.”
There’s never been a Wozniak who didn’t have a Jobs, and there’s certainly never been a Jobs without a Wozniak. Having a balance between deep engineering expertise, market awareness, and the ability to tell your story in the early days is how you get to the next level, so make sure that your team and your journey feels well rounded, and that engineering successes result in market successes.
Technology
I think many people have had plenty to say about this, particularly recently, so I’m probably not going to tell you anything you don’t already know,. Maybe I can say this in a way that nobody has said it previously:
Defensibility is the most important thing. Particularly now.
Essentially, the most important element to me is that someone can’t create a prototype of your business in a weekend. The number of AI startups i’ve looked at recently that are some iteration of [web app] <—-> [gpt API] is pretty telling. There’s a lot of excitement about this space, everyone wants to be a part of it, and most people don’t know what to do with an LLM that’s even remotely defensible.
So, if you’re going to go pitch professional investors for money, you should make sure that you’re doing something other than prompt engineering, unless that prompt engineering is feeding a bigger process that is protectable.
Traction
I left this for last because at the stage I typically invest in, its the least important thing. In a seed round level company, traction serves as a crucial indicator of potential success. It demonstrates market validation and customer interest, which in turn can attract investors and secure additional funding. Traction provides tangible evidence that the company's product or service holds value and is gaining traction within its target market. However, while traction is undoubtedly significant, it only matters after you have something to sell.
There are of course, people who would disagree with me on this (several of them are my close friends, and some of them are my co-investors), and they’re somewhat right in their own way. There is an entire class of business strategies where you can effectively “pre-sell” a concept to the market, but most of them don’t require any significant outside funding.
