[graycat]

In the report, I didn't see much mention of traction, revenue, social proof, etc.

For technology, sure, bio-medical VCs can evaluate that, but I doubt that information technology VCs can or will.

For deal flow, a common remark of VCs is that an entrepreneur who contacts a VC direction is just "coming over the ransom" which means that they are to be ignored. From that contempt, tough to believe that VCs care much about deal flow.

A common remark is that VCs lose money on ~90 percent of their deals but that last 10 percent, or even the one best deal, makes up for all the losses and makes money besides. Okay, then, necessarily what the VCs are interested in are exceptional deals. That is, they are looking for another Microsoft, Apple, Cisco, Google, Facebook. Okay, then in their deal sourcing they have a fundamental problem: They are getting too much of their deal flow from their colleagues, and that's not promising for finding the needed exceptional deals.

[abuteau]

I'd say anticipated exit, comparable companies, competitive pressure and desired ownership play the role of social proof. For revenue, most likely related to the business model.

The interesting distinction in the report was between deal flow and deal selection. VCs care more about deal selection. For deal flow most of it is in their own network or through syndicates.

For the 90% fail 10% success you can look at exit multiples coupled with type of exit (M&A, IPO, failure).

My hypothesis is that most of them dont really have a proprietary deal flow and are unable to make great deal selection apart from the top VCs..

[graycat]

> For revenue, most likely related to the business model.

You totally lost me: In the report, I just didn't see any mention of traction or revenue. I can't see that traction or revenue are part of the business model, product, technology, or anything else that was mentioned.

Business model? Sure, for some early stage, can discuss that independent of traction or revenue.

IMHO, from all I've seen, for information technology VCs and early stage, far and away, far above anything else, what VCs want to see is traction significantly high and growing rapidly. In comparison, everything else is small potatoes. The form of traction they want to see most of all is revenue, but they will also consider number of unique users per month, any COMSCORE data, number of Web pages viewed per month, etc.

My guess is that the LPs enforce the high interest in traction. Or, the LPs very much like traditional accounting, even the traditional approach of a commercial banker where a loan is against assets as counted by usual accounting. Well, for startups, the commercial banker approach won't work, so the VCs talk the LPs into accepting a substitute, a surrogate, traction. So, the asset they are investing in is the traction. For team, determination, technology, business model, etc. accountants and commercial bankers don't care about those, so LPs don't either, so VCs don't either.

Or the VCs believe in a Markov assumption: The past and future of the company are conditionally independent given the current traction and its rate of growth. Or, if the traction is good, then everything must be good. If the traction is not good, then nothing else matters.

The report mentioned that VCs can invest in ideas. My guesses are that information technology VCs regard an idea and a dime as not quite enough to cover half of a 10 cent cup of coffee. The standard remark is that "ideas are easy, plentiful, and worthless. Execution is hard, rare, and everything." Of course, by an idea what VCs have in mind is just some fast, over the back fence to a neighbor description of the project, say, as a user or customer would see it. For people in technology, an idea is something that might get a patent, be protected as a trade secret, is the crucial, core, enabling secret sauce and the main asset of the whole project. Information technology VCs won't evaluate such ideas. I can think of no sense in which a VC will invest in an idea. Moreover, I have to suspect that VCs really hate ideas that would be secret sauce from research. Why? Because the VCs know that that then would be part of the business they would not understand, and that scares them. For technology, what information technology VCs want is just some routine software that, if necessary, they could turn over to any of 20 programmers they could recruit in less than a week.

My guess about VCs is that they are looking for some special situations. So, there are, say, four co-founders. The company has traction significant and growing rapidly. But so far the company is still losing money and, really, is about to go out of business. All the credit cards are maxed out. All four co-founders are married, and all the wives are pregnant. Then, sure, a VC might give enough money for a little more runway and take a lot of control. The company is so desperate that they are ready to sign a bad business deal. The VC sees that even if the company totally flops, given the four co-founders, he could likely get his investment back from just an acqui-hire.