The answer to what venture capitalists look for in their investments is complex and there’s certainly no checklist that you can follow for investability. I’ll share an overview of my perspective on Venture Capital Investing.

If you were to ask me the ONE thing we look for in an investment, I will give you a simple answer that varies from some other fund managers –  I look for a clear path to an attractive exit.fire_exit-svg

I ask about the exit first because my job is to return capital and profits to Limited Partners.  If I am asking about anything else, I’m not doing my job. I look at many factors, but I look at them through the lens of the exit.

Many fund managers will tell you that the main thing they look for is a great team.  I have met many nice and passionate teams that I liked, but that didn’t have any idea about how to create value for shareholders by engineering a good exit.  They could build a company over time and overcome many obstacles, but at the end of the day, they didn’t know how to exit.

A clear path to exit includes several elements, including an experienced team who knows how to create value, pivot when necessary, and exit at the best time.  These teams have deep industry knowledge and they know where the industry is going and who the acquirers are who will be needing their company’s technology/customers/or other value proposition in a 3-5 year window. I call this the “Wayne Gretzky Factor” after Wayne Gretzky, the hockey player famous for saying that his hockey prowess was due to skating to where the puck is going, and not where it is.

Great team characteristics include an ability to work together, experience in working with fast paced venture-backed companies, willingness to share ownership with investors, coachability, complete team with finance, strategy, technical, sales and marketing skills, and people with industry experience and connections.  Finally, teams that have “grit” are going to work through all the tough spots are the ones that succeed. They are continually doing the hard work needed to achieve success.

A tight strategic plan is a differentiator between companies that are investment ready and those that are not.  I don’t want to invest fund dollars into a company that has “many possible customers”6699678_s  – I want a team who has analyzed all possible customers and determined those for whom the product creates the greatest value and for whom the cost of acquisition is lowest.  The company should not be figuring these questions out with investor money.  A tight strategic plan should include a clear mission, vision and values for the company as well as the major objectives and the strategies the company has to achieve them.  A clear plan will not eliminate bumps in the road, but it will help to navigate a path to exit that is as straight as possible.  It’s well known that companies with written strategic plans outperform those that don’t by 65% or more.  Demanding a tight strategy doesn’t ensure success, but it certainly helps.

Unfair competitive advantage is an important quality we look for.  A company should not be easily copied and it should be clearly different from its competition.  “First to market” is not a viable unfair competitive advantage, though it can sometimes provide advantages over late comers. The main reasons for desiring unfair competitive advantage is that it allows a company to grow with relatively smaller competitive threats, and it creates greater value for acquirers at time for exit.

Traction to Value Ratio is an important consideration in deals we look at.  Ideally companies have accomplished various types of traction, though there are no hard and fast rules about what that might be.  For some companies it might be having several patents.  For others it could be acquiring FDA or CEMark certifications.  Still others might get traction through technical development, customer and revenue development or other benchmarks.  Having significant traction shows us that the company can execute and it’s more than just a plan.  Achieving milestones adds value to the company.  Since our average valuation at time of investment is in the $3.5 – 4 million range, the company needs to be able to show it has accomplished enough to be worth that amount.  Some companies that have achieved higher levels of traction will warrant higher valuations.  We’re always looking for a good,but fair, deal. This means we’re wary of companies that are asking for high valuations without the traction to back it up.

A good deal is important for investment. I’ve read some ridiculous blogs by investors who claim that valuation doesn’t matter.  They point out that the difference between a valuation of $4 and $5 million dollars today with a $1 million investment is the difference between 20 and 25%.  After multiple rounds of dilution, the total ownership may drop down to a difference of 8 and 10%.  So, if there’s a $100 million exit, the difference in return is only $2 million out of $100 million.  That’s one way to look at it, but another way to look at it is that the $5 million initial valuation yielded an 8X return and the $4 million valuation yielded a 10X return.  This is a 20% difference in return to investors – it is not insignificant.  The fund manager’s job is to return maximum return to investors and this is done in a variety of ways including determining a fair valuation.  Note that a fair valuation is not necessarily the lowest valuation, but one that will return the highest returns to investors.  Too low valuations often result in unmotivated founders, or insufficient equity to raise additional rounds needed to grow the company to its greatest value.  

The benchmark we’re looking for is to return 10X to investors within five years.  

This is about a 60% IRR.  This is the same as getting 25X in seven years or 4X in three years in terms of IRR (internal rate of return).  We invest with a portfolio strategy, so we look for companies that have the ability to return 10X or more and invest as if it was our only investment, but understand that some will be winners and others will return less than 1X.  If a company can’t demonstrate a clear path to a 60% or greater IRR for investors, then it’s not something that we would pursue.

Negotiating the deal goes beyond valuation.

Investment Process Concept on the Mechanism of Metal Gears.

We also look for deal terms that provide industry norms such as 1X liquidation preference (non-participating), control provisions, board seats, right of first refusal for follow-on investment to maintain pro-rata shares, and more.  The terms of the deal can be as important or more important than just the valuation and we look for terms that are reasonable and fair for everyone while protecting the investors interests.

Strong marketing and go to market strategy are important.  By the time a company comes to us they should have solved all or most of their technical challenges and the funds we’re providing are to validate the market and let the company build to a run rate of $1 million or more.  These are rules of thumb, but apply in many cases.  So, this means that the primary risk facing the company at this point is a failure to execute a go to market strategy with sufficient channel penetration to grow quickly and utilize leverage through use of multiple channels and or partnerships.  We see a number of companies whose strategy is to market through “word of mouth”.  This is an example of a good starting point, but a strategy that is probably not scalable. It’s typically much harder for companies to achieve sales objectives than they think, and we like to see a well thought out plan vs.a 1.0 strategy which will not achieve the objectives.

A believable proforma is a key factor, but not for the reasons some would believe.  We don’t expect companies to hit the numbers that they project, but we do expect that they will have done the work to research industry norms for key ratios and that they are able to model out their strategies in sufficient detail to understand their capital needs and develop a solid capital strategy from there.  The proforma should show not only the current raise, but should also show all planned subsequent raises. The valuation, proforma, exit strategy, marketing strategy and capital strategy should all be aligned and in agreement with each other.  The proforma should show growth at believable rates which nonetheless result in a target revenue number by year five that is in the norm for acquisitions in their industry. If the number is significantly lower, then they may not represent an attractive M&A target.  If the number is significantly higher, then they may be too expensive for M&A, leaving IPO as the only exit option.  IPO is not a bad thing, providing that it is a realistic goal.

It’s important for the CEO to be comfortable with uncertainty.  

This isn’t a quality you hear about often from fund managers, but here’s why I think it’s important.  I’ve met a lot of CEOs who tell me that it’s ridiculous to ask for a proforma because we all know it will be wrong.  Others tell me that asking for an exit strategy is an exercise in futility because you can’t know who is going to acquire you or when it will happen.  Both of these statements are true with regard to the fact that there is extraordinary uncertainty facing the company. Some CEOs are afraid of uncertainty and resort to inaction.  These CEOs don’t pave their own way into the future, but wait for it to come to them. The likelihood of success for these CEOs is far less than those who recognize uncertainty and strive to understand its limits and build a plan to achieve success.  They make the future rather than just waiting for it to happen.  In the case of exit strategies, this shows itself in how the CEO plans for exits.  While it’s true that you can’t know who will acquire you or when, you definitely can understand how your company would provide value and for whom it would be valuable.  You can then design your company to meet the needs of possible acquirers and, having identified them, create relationships with the CEOs, strategists and business development teams within those target companies.  That way, when eighteen months from now, their board decides that it needs to acquire a company just like yours, they know exactly who to call.  These calls result in “strategic” acquisitions vs. “financial” acquisitions.  Because strategic acquisitions result in multiples that are 4-20X more than financial acquisitions, having spent the time to identify these acquirers and create relationships can more than double the return to Limited Partners in a fund.

Meta Due Diligence is as Important as the Due Diligence Itself.

We look at all of these factors ranging from markets, to finances, team dynamics, product, IP, legal, valuation and the deal while we’re going through the due diligence process. The other thing I Peter Adamslook at is what I call “meta-due diligence.”  Meta-due diligence refers to how the team responds to the difficult process of investigation that investors go through.  Great companies welcome the process, and are organized with their information.  They respond well and with candor even when tough questions are asked.  Ultimately they know that one reason that investors who do thorough due diligence on companies isn’t just because they’re weeding out the losers, but that by pushing for validation of strategy, investors are actually making companies stronger and more likely to succeed.  Investors who do 40 or more hours of diligence on a company report returns of up to five times greater than those who do casual diligence.  Rockies Venture Fund  does over 100 hours and often much more than that on the deals we invest in. Some companies are technically “cleared” in the diligence process, but the relationship becomes so strained and confrontational by their refusal to participate and their belief that diligence takes away from their time to “build their company”, that they end up revealing that they don’t understand the value of diligence in building their company’s value and they would rather pursue a “ready-fire-aim” approach to business without validated strategy.  Rockies Venture Fund avoids these companies.

I hope these points help to clarify what we look for in the companies that become part of our portfolio.  There are many more factors, many of which are balances between subtle polar opposites.  We ask our CEOs to be confident and humble at the same time.  Proformas should show a hockey stick path, but should be researched and realistic as well. Startup CEOs should be coachable, but should show the leadership to know when to decline well meaning advice. Companies need to show fast growth, but they need to operate within their resources or risk crashing and burning. And the list goes on.

I believe that it’s easy to teach someone about venture capital and how it works.  The mechanics and best practices are well known and can be taught.  The art of choosing, nurturing and exciting great companies continues to improve after a fund manager has spent their 10,000 hours that Malcolm Gladwell talks about in Outliers.  It takes so much time because the cues are subtle and it takes experience to watch which companies succeed and which companies fail. A good fund manager knows they won’t be right all of the time, but they will be right enough of the time to provide great returns to investors and to help foster economic development and job creation in their communities.



Venture Capital for DummiesPeter Adams is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado State University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

Startups around the world are being told to develop strategies to scale up.25125832_m

They begin in largely unstructured teams that respond quickly to rapidly changing conditions and they are lean and focused. To scale up, they need to understand how to gain more income per employee by developing systems, specialization of roles, clear plans and KPIs for success. Startups need to make these changes as they grow because the ad hoc management methods many startups use will collapse under their own weight as the company scales from ten to twenty five to one hundred, to five hundred and to one thousand or more employees.

Large corporations are rewarded by relying on the systems that allow them to operate effectively at scale.

The culture is designed to support systems and process – but this is the very culture that kills startups.

What makes large companies successful is what kills innovation and ideas in startups.

Scaling Down is about re-defining how corporate innovation programs work. It’s about learning from lean and fast-moving startups and building innovation programs that look like startups but that serve a bigger corporate strategic need.

Corporate innovation programs are broken. What used to work with internal R&D programs no longer fits the fast paced innovation that global competitors are bringing to the marketplace. Internal innovation programs operate slowly, consume huge resources and can’t keep up with startups that can operate without all the corporate management baggage and anti-innovation cultures that kill ideas.

Scaling down is a process driven program that begins by identifying global trends to determine the direction that an industry is headed in. It then assesses the corporation’s strengths that it can bring to innovation and designs an innovation program that takes advantage of these strengths while eliminating the startup-killers that have made them successful. Finally, the Scaling Down program leads into the HyperAccelerator model that creates a pathway to de-risking and accelerating the innovation process.

Too many startups stress about how to get their whole story into a five minute pitch and they don’t think enough about how to cheat time a bit to get the most out of the five minutes (or two, sevenPitch Timer, ten, twelve, fifteen or whatever you’re given). This is the first to two blogs on the topic of how to cheat time — the first has to do do with the first slide and the second has to do with the last slide.

Ask yourself this – “When does the clock start at a pitch event?”

The answer is that it usually starts the moment you begin speaking. So you’re in control of when the clock starts. Now – what happens before you speak? The answer is that usually you are introduced by the MC or moderator and the first slide of your deck is queued up on the screen as you’re approaching the stage.

Here’s where many companies have a lost opportunity. Their first slide has mostly useless information that is already known to the audience. Why have a slide that has your company name, the date, the name of the event, the city, etc? Why not make sure, since your slide will be up on the screen for up to sixty seconds before you start talking, that the slide is doing a lot of work for you.

Your opening slide can:

Tell the audience about what market you’re in.
What is your product/service.
What is your primary value proposition?
And more!

At the very least, you should compose a tag line below your company name that is a tweet or less (140 characters) that describes your company, industry, and key differentiators.

If you do this, you’ll have the audience queued up and ready to hear a pitch for what you do.

I call this process “building a box”. When you do this, you’re developing a conceptual framework into which everything you say can be placed in context. People who don’t build a box early on in their pitch leave us guessing and ultimately uninterested in the pitch.  This is the way the human brain works – we have a hard time processing information that is out of context – yet inexplicably, over half of VC pitches leave out the context until we’re half way through the pitch or more!

Don’t keep the audience guessing until half of the way through your pitch about what you do.

If the audience doesn’t get what you do within the first thirty seconds of your pitch – you’re dead.

Why not use that first slide to make sure that the audience knows what you do BEFORE YOU EVEN START SPEAKING?

Too many startups stress about how to get their whole story into a five minute pitchVC Pitch Last Slide and they don’t think enough about how to cheat time to get more out of their pitch.

You can cheat just a bit to get the most out of the five minutes (or two, seven, ten, twelve, fifteen or whatever you’re given). This is the first to two blogs on the topic of how to cheat time — the first has to do do with the first slide and the second has to do with the last slide.

Ask yourself this – how long is the last slide up on the screen?

The answer is that in a five minute pitch event, the last slide is usually up for five minutes of Q&A. If this slide is up for five minutes, why do so many people waste this opportunity by having the slide say “Thank You” and their email. Most pitch events provide your email to all attendees, and it’s great that you’re polite with the “thank you”, but it would be much better if you could effectively use that time and that slide to reinforce the key points of your pitch.

A good last slide will reiterate the highlights of your pitch.

You can have the team, product, market, traction, the deal, or whatever you like. I have seen slides broken up into as many as six sections with key elements reinforced in each. Since this slide is up for so long, the twenty five word limit for slides in a pitch event is waived! Go ahead and toot your horn.

The kiss of death for a pitch is when nobody has any questions for the presenter. This means that either people didn’t understand your pitch, or that they understood it well and had absolutely no interest. The last slide will help clarify key points, but most importantly, it will provide key points that people can ask questions about. Sometimes people are shy to ask a question and sound dumb if they didn’t understand something. Sometimes in a big pitch event, people may even get confused and ask a question that doesn’t even pertain to your company, but might have been from one or two pitches prior. Having your key points up on the screen gib vets them the confidence to ask questions.

Of course – the other great solution to silence during Q&A is to have Back Pocket Slides that you can draw on to effectively extend your pitch if nobody asks any questions!

Giving a VC pitch to angel investors or VCs can be nerve wracking for many startups, but one technique that can Venture Capital Back Pocket Slideshelp startups regain control and confidence is to have a full suite of Back Pocket Slides.

Back pocket slides are slides after your final slide in your deck that contain details about items you might not have had time to cover in your vc pitch, or that you anticipate might come up during Q&A. Examples of these things might include a competitive matrix, an outline of your IP strategy, or some detail on your go to market strategy and key metrics. These are all optional items in the typical pitch, but could be of interest to investors and are things that often come up during Q&A.

Imagine that you’ve just given your VC pitch, and you’ve got a great final slide that summarizes all your high points, but you still don’t have any questions. The audience is totally dead – what do you do?

A good presenter will wait about 10-12 seconds and if there are no questions, then they’ll say “one thing a lot of people ask me about is … Our competitive matrix. You’ll then shift to your competitive matrix slide and continue presenting with the same cadence and timing you used during your pitch. I.e. If your average slide time is 20-30 seconds, then you should maintain that same cadence with the back pocket slides. After you’re done with the slide, then pause to ask if there are any questions. Wait for up to five or six seconds and then start in with “another thing a lot of people ask about is…..” And start on another slide. I’ve never seen anyone need to use more than two slides in this way before the questions start rolling in.

Of course if there are questions, then you can also use the back pocket slides to reinforce your answers. It will make you appear much more in control if you have anticipated many of the questions and have pre-prepared detailed answers for them.

A good number of back pocket slides is five. Two or three can work, but you’re not as likely to get a hit during Q&A as if you have five. Some people have ten or more slides, but I find that they often have difficulty fumbling through them on stage in order to find them quickly, that this can sometimes backfire.

Finally, one more benefit of the back pocket slides is that if you’re invited to another venue that offers a ten minute pitch format, then you’ve already got your extra slides all put together and they become your primary slides instead of your back pocket slides!

Many angel investors who are actively considering becoming a Limited Partner in a venture fund have questions about how capital calls work.  Angels are used to making a commitment to fund a deal, then writing a check or wiring funds and they’re done until the deal exits.

Capital Calls Maximize Investor ReturnsYellow phone icon Free Vector

Venture capital funds are designed to maximize investor returns, and have an investment period of up to four or five years, so rather than take all the money at once and literally have millions of dollars in an escrow account, the fund uses “capital calls” to collect money from investors only as it is needed.  This way an investor can keep their funds in a liquid investment vehicle such as a mutual fund or 401K retirement account that is hopefully appreciating or earning interest until the capital call occurs.

When the fund is preparing to make an investment, it issues a capital call to its Limited Partners.  The LPs then typically wire funds to the VC escrow account and when all funds are collected, the fund then closes on the investment and wires funds to the portfolio company.

What all this means to the Limited Partner is that they will not need to remit their entire commitment when they join the venture capital fund.  They may have an initial capital call for 10% or so of their commitment, and the rest would be allocated over a three to five year period.  So, someone who invests $200,000 in a venture capital fund might only be investing $50,000 per year for four years. There are two things to think about in terms of fund strategy that LPs should be aware of in order to plan for their investment.

  • Most funds invest in 15-30 companies, although there are some that invest in significantly greater or fewer numbers. So, you should plan on about 20 investments for a typical fund that is diversified across multiple portfolio companies.
  • Most funds retain 25-50% of the fund for follow-on investments. This allows the fund to participate in second and third rounds and maintain their pro-rata investment percentage in the companies.  If the fund invested in twenty companies in the first round, it may double down on only four or five of those for the second rounds to profit from the companies that look like they will provide the greatest returns.

The Capital Call Spreads out the Investment Over Several Years

So, if you’re thinking about becoming a Limited Partner in a fund, understand that capital calls are a good thing that are designed to maximize your return on investment and spread out the requests for funds over a period of multiple years as the fund makes its investments.

Happy Investing!

To learn more about the Rockies Venture Fund, I LP, please contact us at (720)353-9350
To schedule an in person meeting to learn more, visit
Also, visit



Venture Capital for DummiesPeter Adams is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado State University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

fire_exit-svgI heard it again this week.  The lame startup who answered that they didn’t have an exit strategy because they just wanted to create value for their customer.  I’ve heard this so many times by CEOs who think they’re being noble by focusing on their passion and commitment to the company and not to an exit – but what I hear is that they are NOT truly committed to their business.

  CEOs who don’t have an exit plan are limiting the potential for their business.

The fundamental lie of exit denial is in the belief that creating value for the customer is the same as creating value for the business.  Think about it – if you do something really well and create value for a customer, and you’re passionate about carrying out that mission to the greatest extent possible, then wouldn’t it be a good idea to identify larger companies who shared your values and could carry out the mission to even greater extents with their additional resources, capital, sales channels and expertise? Creating value for the acquirer means creating value for the customer as well – it’s rare that anyone wants to acquire a company with no customers.

But no – you’re just creating value for the customer, and then if you do that, acquisition offers will come along….eventually.  Yes, offers will come along, but they may not be from companies that share your values.  They may be from companies that want to shut you down.  They may be from companies that want to exploit your product or customers.  Just passively waiting for a suitor to come along is a cheap cop-out for lazy CEOs who believe that uncertainty means that you have to wait for whatever the world brings you.

Companies who are truly passionate about their mission are working to develop two value propositions simultaneously – the value proposition for their “first customer” who buys their product and the value proposition for the “second customer” who buys the company. Wayne Gretzky Exit Strategy

CEOs who think about the second customer are the ones who get me excited because they exhibit deep knowledge of their industry.  Like Wayne Gretzky, the hockey player who famously said “I don’t go to where the puck is, I go to where the puck is going,” these CEOs have identified a trend and they build value for companies in their industry who will be needing their innovation within a three to five year window.

To be sure, there is uncertainty.  You can’t just pick the acquirer, date and amount of acquisition.  This does not mean, however, that you can’t research comparable transactions and identify the key players and their behaviors.  You can create relationships with the companies who will be needing your technology so that when their board identifies a need for your product/service, they know that you are a key player in the industry that would be a good acquisition target and can reach out with an offer.

Identifying multiple bidders for your exit strategy not only allows you to select 6699678_sthe bidder who most closely matches your values and goals for the company, but also allows you to demand top dollar for the acquisition.

No, it’s not all about the money, but if you put your head in the sand and just wait for suitors, you will likely end up with a lower price for your acquisition and more importantly you may fail to truly carry out the mission of your company to its fullest potential.

Create a detailed exit strategy and show everyone your passion for the mission of your company.

Meet Speakers and the Companies that will be at CCS 2016! Cannabis represents a new industry in Colorado and perhaps nationwide in the years to come. With new industries come new opportunities for business and for investors. The Rockies Venture Club presents the second annual Cannabis Capital Summit in celebration of these opportunities while also discussing the […]

Rockies Venture Club invests in a variety of companies, not just one vertical. This allows for investments in different types of industries each with their own unique markets, experts, and strategies. Here are three of the top industries that are being invested in right now.


Healthcare – Digital access to health

The healthcare industry is is currently in a climb. With the integration of healthcare and technology, access, and ease of use are making old painful processes easier than ever. This telemedicine prompted the founding of CirrusMD. CirrusMD is one of the healthcare investments in the RVC portfolio. They give immediate access to healthcare providers to anyone that has text messaging, answering all your medical questions needs remotely and accurately. Its simple changes like these, along with others like new ways to track health and provide insight that are changing the landscape and making healthcare a top industry.


Fintech – New Access to Capital

Disrupting access to capital has been a trend in the recent past. With the emergence of crowdfunding, the old ways of getting money are facing some competition. Enter P2BInvestor. P2Bi is revolutionizing the way you get credit. By making a line of revolving credit that is secured by assets like receivables or investors, P2Bi can help improve the cash flow for small or big companies. P2Bi happens to be another RVC portfolio company, that is in one of the fastest growing industries today.

Cyber Security

Cyber Security is not stealing the thunder when it comes to trending industries, but is one of the most important. With the integration of technology into almost all other industries, the risk of security becomes even higher. Just take a look at all of the security breaches in the news. Swimlane is an RVC portfolio company that helps combat security fatigue. With the constant attempts to breach security, there are a lot of false alarms that are time consuming. Swimlane works to automate that process freeing up time and resources. Cybersecurity is a big industry and is going to continue to grow as the other industries incorporate technology into their models.


Rockies Venture Club has funded 14 deals in the past year, bringing its portfolio mix to include 55% companies which are female and minority led vs. the national average of just 14.4%. Read more