What VCs Really Think of Your Startup

Objective

Understand the key criteria venture capitalists use to evaluate startups, broken down by type of business or vertical (B2B SaaS, D2C, Deep Tech), and how to position your startup effectively to meet their expectations.

Context: Front Line Lessons from an Operator, Founder, and VC

Lane Litz, a startup founder, operator, and VC, and CEO & Co-Founder of Speakia, a direct-to-consumer (D2C) app targeting the Chinese market for English education. Her experience includes pitching to over 100 investors to secure funding and scaling Speakia to acquisition.

As a venture capitalist and key contributor to VIPKID’s $3 billion valuation, Lane has deep insights into aligning startups with VC expectations.

Core Concepts

1. The Billion-Dollar Market Test

What VCs Want:

• A target market worth at least $1 billion.
• Scalable solutions that promise 10x returns on investment.

Challenge: Balance visionary ambition with focused, realistic execution.

Actionable Tip: Clearly articulate both the size of your market and your roadmap to capture it—and demonstrate that you’re enough of a tiger to take over a world market.

2. Business Models: Tailoring to Expectations

VCs evaluate business models based on the vertical. All business models require a defensible moat to ensure long-term sustainability and competitive advantage. Here’s how you can align with their expectations:

B2B SaaS:

VC Expectation: Unique solutions addressing unmet needs.

Challenge: Differentiate in a crowded, mature market. B2B SaaS has been around for over 30 years, and a better UX simply isn’t enough. If your competitors matrix includes a big player in your category, you’re in trouble.

Actionable Insight: Focus on a defensible moat that leverages unique capabilities or insights. Highlight how your product not only solves specific pain points but also creates lasting competitive advantages.

B2B SaaS Pitch Deck Template - Learn how to structure a compelling B2B SaaS pitch deck that effectively communicates your startup's value proposition, market opportunity, and scalability to VCs.

Deep Tech:

VC Expectation: Proprietary IP and long-term R&D potential.

Challenge: Jumping the funding gap between university R&D and seed funding demonstrates execution, resilience, and startup thinking. It also involves achieving lab-scale validation that isn’t generally funded, which establishes credibility through technical expertise and a capable team.

Actionable Insight: Showcase lab-scale validation to prove foundational scientific breakthroughs work in the real world.

D2C:

VC Expectation: Scalable sales channels and low CAC vs. high LTV.

Challenge: Low-cost acquisition strategies like referral point to customer love and potential virality. Founders must emphasize retention and upsell, as the days of VC money fueling the fire of constant acquisition are over.

Actionable Insight: Focus on sustainable growth strategies that deliver value without excessive spending. If you have to spend for your first customers, you'll never stop spending.

3. Founders: The Core Investment

What VCs Look For:

• Insider knowledge: Deep expertise in the field signals credibility.
• Personal motivation: A genuine connection to the problem shows commitment. Putting your own money into your startup and going in full time are also important signals of your level of motivation.
• Proven track record: Experience, even from prior failures, demonstrates resilience.
• Resourcefulness and leadership: Ability to attract talent and execute efficiently under extreme constraints.
  

Actionable Tips:

• Highlight your track record in scaling operations.
• Emphasize market knowledge and provide evidence of significant market impact.
• Demonstrate your ability to innovate and grow efficiently within constraints.
  

4. Traction: De-Risking Your Venture

What Counts as Traction:

• Letters of intent or early customer interest (sign-ups).
• Retention rates and proof of market demand (sales).
  
• Lab-scale (or real-world) validation (deep tech).

Actionable Tip: 

Quantify your traction with specific proof points that demonstrate market demand and your ability to scale. 

B2B SaaS:

• Signed contracts
• Recurring revenue growth
• Clear indicators of long-term customer retention.

Deep Tech:

• Lab-scale validation
• Defensibility (uniqueness) of IP
• Measurable impact on climate
• Deep tech differs from B2B SaaS and D2C in that it often takes years longer to reach the market, requiring patience and long-term vision from investors. 

D2C:

• Customer acquisition cost (CAC)
• vs. lifetime value (LTV)
• Viral growth indicators
• Sustained high retention rates

5. The Timeline Trap

The Hard Truth: VCs prioritize startups that can achieve $1–2M ARR within 18 months of raising seed funding. Their timeline may not align with your business’s natural growth trajectory.

Actionable Tip: Develop a growth plan that balances VC expectations with your startup’s sustainability. Recognize that 90% of startups that raise seed funding fail to meet Round A milestones and get stuck in what is often called 'Death Valley' or the 'Long Trough of Sorrow.'

The average startup founder takes 5-7 years longer to find product-market fit than anticipated. Building resilience into your strategy is essential to navigate these challenges.

6. Self-Sufficiency: Beyond VC Dependency

The Reality:

• Only 1% of startups secure VC funding.
• VCs prefer businesses already demonstrating success.
  
• 90% of founders who raise a first round of venture capital fail to raise a second.

Actionable Tip:  When traction doesn’t meet expectations (as often happens in ‘Death Valley’), founders are left managing a struggling startup with no obligation from VCs to reinvest. Building in self-sufficiency ensures you can weather these challenges and maintain operational momentum.

Always remember - the first round is never the final goal. As a startup founder, your most important job is to never run out of money.

Final Takeaway

VCs assess startups using benchmarks to maximize 10x returns. By addressing these benchmarks—such as targeting a billion-dollar market, demonstrating traction, and showcasing a strong founding team—you signal to investors that your business is scalable, viable, and worth their investment.

Aligning with VC expectations significantly increases your chances of securing funding. If your business doesn’t align with these expectations, it’s not wrong; it’s just not a fit for VC. Only 1% of global startups are. It doesn’t mean your startup is bad or broken.

VC funding is a tool, not the goal. Focus on solving real problems, creating lasting value, and building a self-sustaining business. The right investors will follow.

Explore More Funraising Resources:

The Unwritten Rules of Fundraising

Pitch Deck 101: The Essentials

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Tags: Fundraising, Venture Capital, Seed, How to Raise Money

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