What are VCs looking for in a Startup?

A lot of Entrepreneurs often ask me what Investors are looking for in a Startup. Most Investors (are either clueless or) wont tell you this straight to you, but this is their mandate internally on what they are looking for:

1. A potential 200Mn $ Exit in 4-5 years

2. Company + team should raise not more than 40 - 50$ mn to achieve that.

3. A 200mn$ Exit means (100mn in ecomm transactions, or 40mn being a SaaS Business - you get an idea of the multiple - revenue is per year)

4. Going after a large enough market so that there is enough pie in it for your company to grow exponentially without having to fight tooth and nail and burn more cash in fighting competition. Ideally the size that you need to grow should be 2-10% of this market size.

5. A strong moat - doesn't have to be 100% defensible, but a great team with strong execution capabilities is a quasi moat too. If you have patents, awesome. If you have proprietory access to something even better.

Now this doesn't apply for angel Investors - they will invest in what they feel *feels* right, but if you want to raise any institutional capital post that, you are going to have to hit these milestones. Almost all the top tier VC funds have this metric internally that they use to guage.

IMHO, this is also a very good definition of what a startup is as well. Big Market, Wide open opportunity, and a team that has sharp, clean and fast execution to capture that market. That's a startup. Everything else is either a small business or a flailing startup (or will be one).

A lot of folks say that being a "startup" is about culture etc. But the technical answer as to what is a "startup" is the model - and execution. My strong advice is not to try propping up your company to look like this so that it passes through ( a reason why investors dont talk about this openly ), but atleast to understand your model and realize if it doesnt fit the criteria you need to look at alternate ways to raise capital - or even raise one angel round and then grow this with different sources of capital.