3 Questions Every VC Must Ask In the Investment Decision Processby Brady Bohrmann, Partner at Avalon Ventures

About Brady Bohrmann

Brady has over 20 years of experience as a venture capitalist and operating executive in both information technology and biotech. His focus is on early-stage investments and backing talented entrepreneurs.

Throughout his venture capital career, he has worked with over 75 companies. He currently is a director or observer of many Avalon portfolio companies, including Backupify, Chart.io, Cloudant, Inc., Conjur, Indix, Juliet Marine Systems, Kaltura, Kinvey, Memrise, Nanigans, Pingup, Redbooth, Selectable Media, Simulmedia, The Happy Cloud, Twinstrata and Vook.

The 3 Core Questions:

• Will it work?

• Can I win?

• Is it worth it?

I first heard these three questions from Dick Hale, a former colleague and mentor of mine. Long time COO of M/A-Com, Dick has a way of making complicated things very simple and my favorite expressions of his was “Will it work?, Can I win?, Is it worth it?”

These questions have stayed with me and have become a core part of my investment decision process.

When Due Diligence Isn’t Enough

Venture Capitalists are always trying to make sense from the chaos of rapidly changing technologies, innovations, marketplaces, competitive landscapes, business models, management teams and more.

For early stage investing, classic due diligence is of marginal value because most big ideas are trying to either create or transform a market.

What you believe is more important than what you discover in diligence.

Signal vs. Noise

Teasing out that coveted signal to invest from all the noise is challenging and as much an art as it is a science.

Simple Truths

After all the research, analysis and due diligence is done, it’s often helpful to fall back on a few simple truths, and in my case, Dicks’ words of advice.

This is how I put into practice these 3 questions:

1. Will It Work?

However we get there, there must be an underlying conviction that the product or service can be built and will work.

Will it Work?Is there evidence to support that the product, service, etc. will

work?

As early stage investors:

• We often invest in companies where the product may still be a work in progress.

• We need to suspend our disbelief.

• We need to rely on our judgment, or that of others we trust.

• We need a simple act of faith in the founding team.

2. Can I Win?

Does your product, service, idea have an edge from which you can separate yourself from the pack and extend your lead?

Can I Win?

There is a good chance that whatever product or service it is that you are building, there are dozens of others thinking along similar lines.

Can I Win?

The hard truth is that your idea is far less important than your ability to execute on it. This is the essence of competition, and competition is the engine of innovation.

The best entrepreneurs are the ones that out-execute the competition.

Can I Win?At Avalon Ventures, for example, we look for that something special — an edge from which you can separate yourself from the pack and extend your lead.

This can be anything from:

• A uniquely differentiated product.

• An early stage market advantage.

• The first to achieve scale.

• A network effect.

3. Is It Worth It?

There is no common definition of worth among VCs, but it is often tied to the stage of investment.

Is It Worth It?

Venture capital is a truthful business, and that truth is measured in the returns we provide our investors.

Is It Worth It?

We say “No” to many great ideas and teams because we may not see the value of the ideas as big enough or we just can’t clearly see our way to an exit.

The challenge for you is to understand how the VCs you are talking to define a worthwhile exit.

Is It Worth It?

There is no common definition of “worth” among VC funds, and it is often tied to the stage of investment.

Typically it ranges from the aspirational “billion dollar idea” to some target multiple of invested capital.

In Practice

an example:Take for example Avalon’s investment in Simulmedia, a company that brings online and data methodologies to traditional TV advertising.

Founded by serial entrepreneur Dave Morgan, a pioneer of online behavioral marketing and digital advertising, the company makes TV ads more relevant for viewers, more efficient for advertisers and more profitable for media owners.

an example:Answering the 3 Questions on Simulmedia:

Will it work? Dave and his team are seasoned pros and have the chops to build the platform. Check!

Can I win? Great team and unique technology combined with wide open playing field. Check!

Is it worth it? Cracking the nut of TV advertising is a billion dollar idea. Check!

The Takeaway• These 3 simple questions have

proven their value over and over.

• They simplify what otherwise can be a complicated investment decision.

• They help test our conviction and provide comfort to continue investing when a company hits tough times yet is deserving of continued support.

Learn more!Visit http://avalon-ventures.com/blog for more actionable advice on early stage startups, VC funding and other entrepreneurial tips.