Is Your Company Venture-backable?

So, you want to be an entrepreneur. Well, it's a great time to start a business. We're in a jobless recovery, so the talent is out there for the picking. Sure, some VCs are a little gun-shy, but the smart ones are investing. How do you get them to invest in you?

There are lots of articles about this kind of thing. But I haven't seen one that reduces all the noise out there to the following five fundamental elements. In my experience as a former VC and a current entrepreneur, all the factors surrounding a start-up investment reduce to exactly five factors. You can find no shortage of chatter and opinion about other things that also matter. Trust me: If you have these five, nothing else matters. Each one that you don't have is a serious, perhaps fatal, flaw in your plan.

1. Huge value-add idea. You need more than just a great idea. Your product or service must add an enormous amount of value to some industry. If the idea isn't completely new, it has to be better, cheaper, or more efficient than what we already have. Meaning, your solar-powered mousetrap better be a big improvement over today's pest control. For B2B plays, you want to cure pain. The best way to land corporate customers is to save them lots of money or make their pain go away. For consumer plays, the ideal is a naturally viral product; that way your customers become your salespeople.

2. Big market. No one cares how valuable your product is if its addressable market is small. The key isn't so much the number of users as it is the dollar size of the market. VCs won't get out of bed in the morning for less than $1B in market size. $5B is better. Don't be fooled that companies like Facebook and Twitter are aggressively adding users rather than revenues. User bases that explosive and that sticky can be monetized at any time.

A VC is like a supermodel hanging out at a bar. They hear bullshit all day long. So: NEVER try to bullshit a VC. Your market must be authentically available. Selling new self-sterilizing toothbrushes to hospitals doesn't mean you'll have access to the entire $7 trillion global health care industry--only a magic cure-all pill could give you that. Your market size is the number of dollars available to you if you had 100% market share with your product, not the larger industry your product plays in.

3. Favorable marketplace dynamics. It's not enough to have a value-adding product in a big market. You also need the right conditions. Will you be able to scale revenues within a 5-10 year time frame? Is the timing right? YouTube wouldn't have worked pre-broadband. Facebook wouldn't have worked if MySpace hadn't sucked.

Ask yourself: Is the competitive landscape favorable? There will no doubt be competition--but it needs to be doing something demonstrably wrong. If you tell a VC there's no competition s/he assumes it's not an interesting market or you're such a bullshit artist that you'll be too difficult to work with (see lie #5 on Kawasaki's list).

4. The right things wrong with it. "Risk is our business," Captain Kirk once told his management team on the Enterprise. So it is with VCs. If your business had no risk, you could go get a bank loan and call it a day. VCs like risks--without them venture capital wouldn't exist. But they need to be risks that VCs are good at assessing and managing. You're a product wiz but hopeless at marketing? You need a lot of guidance on patents? You need to fill out your management team? VCs love these kinds of risks. Not having a clearly large addressable market? That's a deal breaker of a risk.

5. The A Team. So let's say you've convinced me that your idea is a huge value-add, the market size is massive, your position will be defensible, and the risks are manageable. The venture will still fail without the right team building it. No matter how excited you've gotten them about all of the above, VCs won't fund you if you're Elmer Fudd. And they may take your awesome idea and fund Bugs Bunny to start it instead. Brutal for you, but you should have gone to see them with a real team, not you and your stoner college roommate. If you don't have the best people for the job (even if that means replacing yourself as CEO), no good VC will invest. The scrupulous ones won't fund competitors, but they won't fund you either.

Hope this was helpful. Now get out there and start brainstorming your idea. Just one caveat: If you're thinking about building a revolutionary adaptive learning engine that will customize each person's daily homework down to the concept level--you're too late! Knewton is already doing that. :)

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