Michael Deem

I was an Entrepreneur in Residence (EIR) at Khosla Ventures for a year.  Here are the 7 things that can make them want to invest in you.  In each case, I give you, a great founder, suggestions for how to best present your startup.

Management.  Have you done this before?  Do you or your team have successful exits?  Are you “can’t miss”?  If so, fantastic!  First time founders may have more motivation and tenacity, which can overcome lack of experience.  Knowledge is less important than persistence.

Market. Have a huge potential market.  The VC is looking to ‘return the fund’ with their investment in you.  Your existing or potential market should align with the VC’s expectations for return, check size, and company valuation.  Can the market size, fraction of the market that your company may secure, and therefore potential company exit valuation of your startup, support the 100x return the VC is looking for?  Khosla Ventures (KV) is willing to take a lot of technical risk, but not market risk.  Each VC’s preference may vary.

Timing.  Why is now a great time for your company?  If your company’s solution is too early for the market, you may run out of money before the market accepts the solution.  If your company is too late (perhaps greater than 5 competitors), it may be hard for your company’s solution to displace existing ones.  In this analysis, take into consideration that your solution should either be solving a problem that currently has no solution, or is solving the problem much more effectively or economically (e.g. 10x better or cheaper).  Also, realize that a solution in development can easily beat a solution on the market.  It is important that your company’s solution beats other companies’ solutions in development.  The Wayne Gretsky quote applies: your company should be skating ahead of where the market is going, not where it is now.  The VC’s database of deal flow can help to evaluate these dynamics with you.

Defensible moat (e.g. Intellectual Property).  How will your company prevent competitors from copying your solution?  In AI SaaS, this might be speed.  The AI SaaS company has to go to market within 6 months, or a competitor will.  In DeepTech or Biotech, this moat will likely be US or world patents.  At the Seed stage, the IP is likely provisional, PCT, or submitted patent applications.  Does your company have potentially “blocking” IP – can you prevent competitors from operating within a wide moat around their solution in the market?  At the Series A stage, you should probably have some allowed claims.  You might consider performing a freedom to operate (FTO) analysis at this stage.  In a well-established existing market, it can be OK if licenses are needed for some parts of the company’s solution.

Coachability.  Are you coachable?  A tier-1 VC like Khosla Ventures has enormous experience.  They can mentor you on everything from science to go-to-market.  If you are willing to listen.  If not, they will likely pass.

Clear Derisking for Timeline.  What is the use of funds?  Spend some time thinking about the round from the VC’s perspective.  How will this investment progress you towards a potential exit?  Try to answer the question: How does this round derisk the next round?  The partner will want to put this in her report.  Help her out with an answer!

Ability to quickly identify ‘Key Questions.’  A workhorse in the VC industry for diligence, stemming from at least Kleiner Perkins, is to identify the Key Questions about a prospective portfolio company.  Some of these will be answered in the initial presentation at the partners’ meeting.  Some of these will be answered in a longer diligence effort.  And some will remain open.  For example, the current raise will fund the work to answer some key questions.  As the founder, try to identify some of these key questions and make it easy for the diligence effort.

Your startup is awesome.  Put your best foot forward as you talk with and pitch to your ideal VCs.

Michael Deem is Managing Partner at Angeliki Fund, a physical and digital private equity infrastructure fund.  Previously Michael was an Entrepreneur in Residence for Khosla Ventures, a tier-1 venture capital firm on Sand Hill.  Michael was part of the founding team of Ion Torrent Systems, sold to ThermoFisher for $2.3B in 2014.  He was the 3rd person and performed all the original engineering calculations.  He was the 10th person and director of drug design at CuraGen ($100M IPO in 1998). He started the first `Synthetic Biology’ PhD program in the US.  He was chair of a top-10 Bioengineering Department, with responsibility for 400 people and $27M annual budget.  Michael is an active member of The National Association of Corporate Directors (NACD).