There are a few things that should be on the checklist of any startup before they think of approaching investors other than friends and family. The first is TAM or “Total Addressable Market”. VCs need big markets to support big companies. A better understanding of VC economics would help explain this a bit better but for the moment, just assume that VCs need big exits otherwise they go out of business. Big exits are usually via IPOs. Rarely does the NYSE or Nasdaq allow listing a company under a $1 billion market cap. In order for a company to list for on a public exchange for a billion dollars, they really need a few hundred million in revenue and lots of growth prospects otherwise, public investors won’t buy into the IPO. After years of rapidly increasing valuations in the space, we’re starting to see some strain in the ride-sharing space after Lyft’s IPO and questions about whether Uber’s IPO will be under the initial target of $125B ( add link to Uber video ) and closer to $100B. Unless the market that a startup is targeting is a multi-billion dollar market or growing rapidly, it’s very difficult to convince most VCs to invest. The quality of the team is also critical to the success of a startup and its execution. If the team is solid, investors are more likely to get excited about investing. Finally, there’s traction. Having traction is critical to an early stage startup looking attractive to angels and VCs. If the traction is strong and there’s a well understood growth plan, investors are more confident that the team can attack the large total addressable market.
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