This question originally appeared on Quora: What things do you look for in a early stage start up to gauge potential? Answer by Josh Kopelman, managing director at First Round Capital.
We are seed-stage investors—and typically invest before a company has any real metrics (i.e., before a product is in the market). So most of our analysis is focused on the founder, the idea, and the market they are targeting. That said here are five specific things we look for:
1. An initial, compelling and unique insight. We want to understand what about your thesis is contrarian (i.e., why do you think the existing players are wrong)—and why you think a startup (and yours specifically) will win.
2. If there is a product in a market, a small group of passionate early customers that love the product is a strong indicator. Several years ago we started to hear First Round founders talking about an amazing new tool called Looker. After we heard about it for the third time in a few weeks, we reached out to the company—and invested.
3. We think that founder-market fit is very important. I’ve lost a ton of money investing in founders with years of enterprise experience who now wanted to pursue a consumer idea—and vice versa.
4. Too many times founders spend a ton of time innovating on their product—but not enough time innovating in their go-to-market. We try to avoid Domino Rally business models.
5. Finally, we spend time thinking about the market the founder is pursuing. Specifically, if they end up winning their market, is it a prize worth winning? The market frequently disparately rewards different types of companies. SaaS companies are valued differently than on-premises software. First-party branded retailers are valued differently than third-party e-commerce sites. Just like real estate has massively different values, so do market segments. To mix a metaphor, before a founder starts building their “house,” it is important to make sure they picked the right parcel of land to build on top of.
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