We work with and/or coach entrepreneurs all the time, and recently realized that many founders have no idea how the VC model works, meaning how and why VCs deploy funds – and make decisions – the way they do. So we’re going to shift the perspective to help you to better understand the process.

You go to investors because you need capital in order to get your company to the next level. Time to think about VC firms as companies as well, because they are. Some of them are large companies, re have a bigger war chest of funds to deploy, but truth be told, the majority are more akin to SMBs. Where does the money come from for the funds? Family offices, high net worth individuals, strategics (eg companies/corporations aligned with the investment vertical or thesis of the fund) or institutional investors (pension funds, university endowment funds, sovereign wealth funds, etc), and the funds manage their investments. The fund’s investors invest in specific funds for various reasons: the expertise of the team, the fund’s track record, their spidey sense, alignment of focus, etc.

Like the VCs who invest in your company, those LPs expect a return on their investments. If the fund fails to do that, well, they’re going to have a harder time attracting investors themselves when they go to raise their next fund, or to put it into startup terms, their Series A, B, whatever.

Which may explain why you’re not getting a lot of interest in your yoga dating app. Is it really a game changer? Is it really going to lead to an investor seeing at 10X return and satisfying their investors?

This is why points such as ‘Sample Addressable Market’ (SAM or the TAM), ‘traction,’ ‘user engagement,’ ‘revenue model,’ ‘MRR’ and ‘ARR’ matter, what to speak of the fact that you’re not the only game in town or the only startup in your particular sliver of the tech ecosystem. Investors – and their teams – see thousands of prospective companies/

competitors that you’ve never heard of and may never hear of, depending on how compelling their product/story is. But they still are a barometer against which you will be measured, nonetheless.

And important note to self: while approaching investors, you want to target those who not only invest in your vertical, but who have not already invested in one of your competitors: do not pass go, do not collect $200. Your product/solution may well be better, and the investor may take the meeting, but keep in mind that they don’t need two similar companies/potential competitors in their portfolio. They may well even see that your solution/product is better – and share that information/your differentiators with the company in whom they have already invested. Why not? That’s where they already have skin in the game, so important in this case to use your spidey sense. Or common sense. Your choice. Yours to potentially lose.

This is why there is such a large focus on the team. It’s not just about the tech: it’s about the commitment and the passion, meaning determination: the fire in the belly that’ll get both sides of the table to the finish line, re to a substantial exit

Always do keep in mind that investment is not free money. Investors are betting on you, just as someone is betting on them. And all parties expect results.

Make sure not to dismiss angel investors – high net worth individuals who are dispensing their own money – and who tend to make decisions faster, since in many cases, they’re only answering to their own conscience. Angels may not do follow on investing as do many a VC firm, but they will often make introductions to VCs, as quite often they’re also LPs in those funds. Consider both individual angels as well as angel groups, such as the New York Angels, Bay Angels, Harvard Business School Angels et al, although the groups do have a longer diligence process than do individual angels. AngelList is also a good resource.

Also keep in mind that the earlier the stage the newco, the greater the risk to the investors and despite the fact that there are VC funds that will invest at the earliest stages, they still want some assurances that you’re capable of executing and see above factors to consider, which all investors do very carefully consider. Only fools rush in, but angels do tend to take more chances, and we will remind you of a point that Brian Cohen, Chairman Emeritus of the NY Angels and Founding Partner of New York Venture Partners once made at one of our investor breakfasts and we paraphrase: “never forget those angels who believed in you from the start, when VCs wouldn’t give you the time of day. People often forget their high school boyfriend who took them to their first dance once they’ve moved on to college boys.”

Very important to keep in mind that old tech adage: that often angels go where VC fear to tread.

Onward and forward.