The Truth Behind How Venture Capital Chooses Startups

Forget the pitch deck. This is the brutal reality.

If you only have 30s to spare, watch this video. It’s the brutal and condensed version.

If you have another five minutes, let me share with you the broader reality I’ve learned, having been on both sides of the negotiating table. None of the sugar-coated stuff for interviews and self-promoting internet articles. Here’s the truth behind how VCs really assess startups.

VCs should live in theme parks with hillbillies

Photo by Gades Photography on Unsplash

We all know VCs love to flock around popular themes. It’s like kids in carnivals queuing up at the most popular rides. At the time of writing it’s Blockchain and AI. And because the money is flowing, startup founders also flock to such themes or try to position their ideas as one.

But to whom do the investments really go to? Ideas are aplenty. Chances are whatever you thought of, there are already other similar startups in the world. So why you?

This is where the VC world gets a bit ‘incestuous’. Like any other business, a lot relies on connections and who you know.

I have an old friend from middle school who is a bonafide billionaire founder. He’s been on the Forbes list since his startup went IPO. His brother founded a healthcare startup a few years ago. He basically went around canvassing for his brother among his contacts and millions flowed in. Not that his brother’s idea didn’t have merit, but it was that much easier.

A former client wanted VC money even though he was already quite affluent. He believed the right heavyweight VC would provide great connections and credibility. But the money manager world was new to him so he sought advice from high society and friends familiar with Silicon Valley. He basically concluded that it was all about your network — someone you knew from college fraternity or an ex-colleague from an investment bank etc. So he went about networking with the right people, and he eventually got funded.

But these are anecdotes, right? They are not statistically significant. Well, no one in the business is going to do a study and admit to something like this. But I did once ask a partner of a leading incubator and seed fund about this. He admitted that 70% of the startups they picked came from referrals and contacts. Only about 30% came from unsolicited pitch decks sent through the formal channels.

Which leads me to my next point…