4 elements this venture capitalist looks for before investing in a startup

Picking the next Uber, Airbnb, Facebook or even Atlassian, for that matter, isn’t a simple game, Starfish Ventures investment principal John Dyson says.

For venture capitalists, when these companies are in the early stages and attempting to raise funding they were relatively unknown. You only have to look at Bessemer Venture Partner’s anti-portfolio, which lists the likes of Apple, Facebook and Tesla as companies it said no to, to see how easy it is for the next unicorn to get rejected.

In 2008, Airbnb was rejected by seven investors who could have had 10% of the company for $150,000.

Dyson says it’s only when startups evolve beyond angel and seed rounds do they begin to emulate some signs of whether they’ll make it or not. Even then, plenty of things can still go wrong.

“In the technology space, later stage startups that have built a proven customer base and are turning over $2-$3 million annually are likely to be ready to grow — both quickly and globally. Or equally, a startup in the life sciences space might have achieved a key clinical testing milestones — for them, that’s when larger investment opportunities arise,” he said.

With that, Dyson has 4 guiding principles he follows when picking the next big thing.

1. Look for the leader

“A startup needs a brilliant chief that also recognises their weaknesses, listens and has a desire to be coached. They must also have the ability to recruit a high quality management team. The leader needs a strong vision for the future and an ability to sell that vision. There’s no room for a big ego. A startup with a founder that thinks they’re always right, is setting itself up for a tough ride.”

2. Company culture

“Renowned author and teacher Peter Drucker once said ‘culture eats strategy for breakfast’ and I couldn’t agree more with this sentiment. You might have the best business strategy in the world, but without a strong culture and a trusted team to deliver it, it’s near impossible to scale quickly or successfully.”

3. Timing is everything

“You have to be ready to become a high growth startup. We look for a proven customer base. As long as the market opportunity has been thoroughly tested, the investment opportunity and scalability should be there.”

4. Be post-seed stage

It’s better if a company has been around the block a few times, has some early stage seed investment that’s been well spent and has gathered some learnings along the way. To know you’re ready to grow, you also need to know what won’t work and what your customer is looking for.

Dyson traditionally skews towards Australian companies. Starfish has invested more than $400 million into over 50 Australian startups since 2001, including Nitro and DesignCrowd.

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