I spoke to an entrepreneur yesterday who is focused on the health and HR markets – two of the toughest markets to target. Health has so many regulations to work with and HR has so little budget. So, take both of them together and unless you have a “head on fire” situation – aka compliance problem, they are very difficult to sell to.
Most, but not all venture investors care deeply about the market you startup is targeting. Here’s a rule of thumb – larger the market, more likely a VC is going to care about your company and to be willing to invest. Billion dollar markets are important to VC’s, and preferably large billion dollar markets. You need to do both a top-down and a bottom-up market analysis to show them that it is a large market. If it is less than a significant size, then I’d advice you not to go pitch VC’s.
In many cases, you wont know the size of the market. It could be small ($100 Million or less) or you just dont know how to position it as a big thing. Most venture investors will take a meeting, but end up not telling you that the market is too small, but tell them to “keep updated”, or “you are too early for us” or “we need to see more traction”.
When you dont know the size of the market or you know that the market is small, then I’d advice you not to go to venture investors. It does not serve your cause and wastes their time.
The second most important reason to get a venture investor on board is if the market is expected to become large “quickly”. While size of market is rather objective, the speed of the market is largely subjective. Which is why venture investors will rely on other “experts”, who understand and know the market well to help them “do due diligence”. If the market is expected to rapidly grow, it makes sense to invest as a VC. Else, your company wont grow quickly and things get difficult.
Many venture investors will also tell you that they invest in entrepreneurs. They tend to focus less on themes and more on the expertise, background, success, knowledge and execution potential of the entrepreneur teams.
Taking a risk on the team is normal for a venture investor, but taking a market risk is rather dumb. If they dont (that’s the problem to a large extent, which is “their” view of the market, not yours) view the market as large or moving quickly then be prepared to have a lot of “meetings with VC’s” resulting in zero follow on meetings or investment.