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Tips from a VC: The Small Business Traits We Love (part 3)

It takes a lot to become a successful small business entrepreneur. That great idea is just the beginning. You need a plan. You need a reliable team. You may need financing beyond what family and friends and your own hard work can provide. We were lucky enough to get some face time with Bob Davis, who founded and was CEO of Lycos and is now a leading venture capitalist with Highland Capital Partners. From his office in Cambridge, Mass., Davis tackled five major areas of small business investment.

In part three, we focus on the special traits that any VC wants to see while considering the next big thing.

You can follow Bob on Twitter on @BobDavisHCP or learn more about him at www.hcp.com

Staples: When you begin to consider investing in a company, what are some of the things you look for?

BD: That’s an easy question to answer. What I look for every time are People, Market and Product, in that order.

People, first and foremost; I look for great leaders and teams. It’s rarely just one individual who gets a business going. I love teams of smart, intelligent, passionate, driven individuals who have demonstrated success in their pasts and are looking to do it again. And by that I don’t necessarily mean they’ve started a company in the past. We often back first time entrepreneurs, but whether the first time or the twentieth we always want to know about the individuals and their backgrounds. We want you to answer a lot of questions that help us understand you, questions such as:

“Tell me your life story”

“What did you do in school that had an impact?”

“What type of leadership roles have you shown in the past?”

“How will your company change the world?”

“How is your thinking different?”

“How have you broken out in the past in terms of what you have done?”

There are no correct answers to these questions but they are a critically important part of the process as a VC and an entrepreneur set about understanding if they are going to be good partners for one another.

Staples: It’s interesting to note that those questions don’t really touch upon the product or service these owners are looking to sell.

BD: Truthfully, it’s very often that an entrepreneur will come and visit us and want to start with “Let me tell you all about my product,” and we have to slow that down and say “Great, and we want to hear about that, but before you get there, I want to know all about you.” The reason being, I want to understand the individual. What’s behind them, why this product or service is important to them, and what their motivation for this idea might be. That’s the first conversation we’re going to have.

When that is complete, I want to hear about their market. Let’s assume your idea is a good one, whatever it might be. That’s not going to matter if the market isn’t big enough to support it. We're looking for growth, and want to believe that the market is big enough, that if we succeed, we have the chance to build a company of distinction. We like to see a marketplace where there’s expansion and where an innovative, unique company could prosper. The adage that says a “rising tide lifts all ships” is so true in a business context.  Your odds of success are just so much greater if your market is expanding.

When it is time to finally look at the product itself, I say,

“Now I know that you are a great person in a big, growing market, so tell me how you are going to go about tackling it. Tell me about your idea and your product and why you think you could build it. And then, if you do build it, why does that matter, why would someone want to care? What are the [pain] points that you are solving?”

And if it is relevant and necessary, how do you get to market faster than a host of potential competitors that are hoping to eat your lunch?

Staples: What are the traits that make you sit back and say, “this is a great team and now I really want to hear about the product and the market they’re in”?

BD: Perseverance is incredibly important. The entrepreneur’s journey is one that will always be riddled with failures and disappointments, whatever the company. The best companies in America can tell you horror stories of their growth in terms of where the company suffered, but to have the courage to pick yourself up and brush yourself off and say “I’m going ahead” is what we look for.

Obviously we also look for intelligence, for smart people who are willing to do their research. Every entrepreneur should ask themselves more tough questions than an outsider could ever hope to think of.  Don’t be cavalier but be comprehensive, thorough and detailed in your research. Pay close attention to the feedback the marketplace gives you with great, great attention to detail. It's infinitely easier to shut down an idea before it ever launches than after many years of hard work and money spent.  It's equally easier to launch a company, hire a team, and motivate yourself with the confidence that the idea is a winner and free of nagging doubts.

We look for a team builder because I haven’t seen a company yet, that’s built on the success of only one individual. This is true with the stalwarts on American ingenuity and companies that have founders closely identified with the company itself.  Big success stories such as Apple and Microsoft required a full team effort. We look for a real team building leader in any investment we make

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