What percentage of ideas submitted to venture capitalists are rubbish?

Q & A with Venture Capitalists - StartupStorey

Introduction

In this article, we asked several venture capitals this intriguing question – what percentage of ideas submitted to Venture Capitalists are rubbish? Who else is in a much better position than the ones who vet these ideas everyday!

Answer from Venture Capitalist - StartupStorey

Andrew, VC, Silicon Valley

No way to really know, of course, you’ll be stuck with anecdotal data but it’s an interesting question.

If you take “venture capitalists” to mean not what it really does, technically, but the way it’s most often used here in Quora, as a bucket term that applies to venture capital and angel investment, then here’s my anecdotal contribution:

I’ve been involved in a local angel group in Oregon since 2009. We get approximately 40 serious submissions per year. So that’s maybe 350 or so that I’ve seen. And we proactively ask for startups to apply, via social media and local news, which increases the odds of what you call rubbish.

In all that time, only about three percent of them got our investment; maybe 10–15 percent got funding somewhere. Most of them were flawed.

But only two I remember, out of more than 300, could have been called rubbish.

If, on the other hand, you mean real venture capitalists, professionals who invest other people’s money for a living, I’d bet that the percentage is even smaller.

The VC world generally gets startups only later in the cycle, after they’ve achieved a lot.

Most venture capitalists ignore ideas that are submitted to them. The only deals that get serious attention are ones that are referred because the success rate of referred deals is much higher than unsolicited submissions.

 

Based on my experience in Founder Institute, where we take >50% of people to apply, and give them a chance to prove themselves by developing the business:

  1. Around 75% of founders don’t launch their business
  2. Another 5–10% graduate with a radically different idea than they started with

Based on that, around 80–85% of entrepreneurs are destined to fail –  a politer term than their idea being rubbish (after all, the problem may not be in the idea, but in the fit between the founder and idea).

 

Answer from Venture Capitalist - StartupStorey

Melissa, Venture Capitalist

here are hard stats across the industry and distinguishing between “rubbish” (viz., at first glance, obviously, no thought required, no way in hell would I invest) ideas and merely bad (e.g., not yet enough traction, mediocre team) pitches is subjective at best.

That said, I can share some rough stats from our application process.

We have a cadre of pre-screeners who we train up to weed out unsuitable applicants. Typically anywhere between 20 to 35% of the startups are limited in this first cut.

That said, we are focused on post seed startups with significant traction so a fair number of the companies eliminated are not “rubbish” but rather are merely one stage too early for us.

If I had to guess, I would say a little over half of the companies eliminated during this first pass are truly awful and the remainder a little too early.

When senior staff take a deeper dive into the remaining 70% or so, another 25% or more jump out at us as being pretty damn bad.

Note that this is not a failure of the prior screeners.

For one thing, we set the bar very low so that they don’t accidentally eliminate a diamond in the rough.

Secondly, it takes fairly well developed pattern recognition and understanding of a particular sector to eliminate some of the companies that might look passable to the uninitiated.

While the vast majority of the remaining startups are ultimately eliminated, it’s more a case of them being not quite ready, not quite good enough, or more subtly flawed rather than being obvious garbage.

 

Answer from Venture Capitalist - StartupStorey

Jacob, VC

Absolute rubbish or merely poorly submitted?

I rarely see anything I’d consider rubbish.

The great majority of ideas submitted to venture capitalists though aren’t of any merit to venture capital. Now, they may be fundable by a bank, corporate partners, convertible debt, friends and family, etc. but venture capital MIGHT be focused as appropriate to the following opportunities:

VC is investment meaning it must deliver an ROI. An outcome. If the business isn’t going to exit, IPO, or can’t (small business, service business, etc.), it generally doesn’t apply to VC.


VC invests in creating much greater value in the entity. If a company is merely seeking money to advertise, pay Sales, etc., it probably isn’t appropriate to VC. What is the investment being made in the business that can’t be achieved otherwise?


Both of those things mean a company has to be chasing roughly 20x future value of current revenues/value.

Lots of different ways that’s calculated so the particulars aren’t my point, simply think of it that a VC has to absorb substantial failures so, seeking an average 10x rate of return on their investments, startups really have to be at least capable of getting to 20x or more ($5MM company today will get to being a $100MM company). If that’s not possible…

Final thought – VC invests in teams. VC looks to alleviate risk by finding teams that are fundable. Sole proprietors or entities that intend to remain only a couple people, usually aren’t for VC.

Of course, there are exceptions to the rule and that doesn’t mean other new ventures that haven’t yet figured those things out shouldn’t be talking to VCs. Nothing therein is necessarily rubbish, merely poorly aligned with what VC actually supports.

Answer from Venture Capitalist - StartupStorey

Charles, VC

Do not ask a fish, elephant or donkey, representing different people with unique ideas, to all climb a tree. The tree representing venture capital’s overwhelmingly uniform investment thesis. Unless you are the proverbial monkey your idea will be considered rubbish.

You see, by virtue of venture capital’s self-induced subpriming, the uniform investment thesis applied by venture capital’s cyclical dogmas mired in collusion, deal fragmentation and excessive syndication portrays exactly to wannabe entrepreneurs what innovation isn’t.

Misleading wannabe entrepreneurs to slip down a slippery slope producing a cesspool of me-toos venture firms now must wade through in order to find the proverbial diamond-in-the-rough.

Innovation is not what venture capital has modeled its prevailing operating-model after in the last twenty years; downstream sub-optimizations of stale and temporal normalizations of truth.

Instead, real innovation to yield venture-style returns comes from upstream reinventions derived from a new and unprecedented normalization of truth capable of producing a new and better normal.

But the definition of rubbish gets whole new meaning when, say, tabloids manage to sell a load of rubbish to innocent people eager to absorb fake news. In the same way money derived from converting advertising clicks on the internet redefines the definition of rubbish.

The point here is to understand in the words of Albert Einstein that “the thesis determines what can be discovered”, and when venture capital as the arbitrage of innovation adjusts its thesis from subprime back to prime and commensurate with the risk-profile of outliers, a different type of entrepreneur will come out of the woodworks to show us what stifling implementation of the norm is ripe for reinvention.

Just remember this: “Not everyone can be an entrepreneur, but an entrepreneur can come from anywhere”

 

Answer from Venture Capitalist - StartupStorey

Gina, Venture Capitalist

‘Unfundable’ is probably more apt to ask since ‘rubbish’ is opinionated. Funded companies get voted with cash.

Most VCs invest in less than 1% of deal flow. Ignoring setting out assumptions, I would posit 99% of startups are generally unfundable.

Having said that, I have seen a lot of very ‘rubbish’ decks in my opinion. Some put in a total lack of effort to truly understand and communicate what they are doing.

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