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How does a venture capitalist know at first sight it's the next big thing

As a venture capitalist or investor, you always look to put your seeds in the next big thing and watch it grow to become a giant tree. But what's the 100% guarantee about the business you're funding and how do you know personally it's a wise move, besides the profile on paper #startups #investment #venture-capital #angel-investing

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Rob’s Answer

How does a VC "know 100%" they are investing in a big business? They do not know. Greater than 50% of VC-businesses fail and the real # may be closer to 95%. It is debatable.

When a VC evaluates a business, the "paper" is far less important than the people. an early-stage VC is really a people-evaluator. They gauge whether the person or team behind the idea has what it takes. For high school students, picture your classmates... who is creative, driven, smart but not necessarily the type to get A's and always do what the teacher or their parents say? These types may give you a clue as to what personalities VC's like to invest in.

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Adam’s Answer

There's never a 100% guarantee in any stage of investment. When we evaluate companies, they are at early stages where they don't have a lot of historical data.

We try to ask the following questions: how are they spending money (cash burn rate), what is their current revenue, and how much does it costs to acquire new customers (known as Customer Acquisition Costs - or CAC). We also have to look at the qualitative aspects - who are the people running the company (what's their background and experience), what is the problem they're trying to solve, and how is their product going to solve that problem.

The goal is to be as thorough as possible in your due diligence, but the reality of startups and VC is that a lot of companies will fail, even if it had seemed like a "sure thing." Don't put all your eggs all in one basket as they say...or to go along with what you said...don't plant all your seeds for one tree! Grow a forest!