In the first post of this series, we provided an overview of the one metric to rule them all (Alpha), outlined why it’s the unifying metric for VC firms, and discussed the four activities to deliver above-average returns for investors.
The last post provided a list of the key things we’ve learned (so far) over our investor journey.
This is the first post where we expand on that list.
Rule #1: The three things we absolutely have to see before investing
As a venture capitalist, we get to meet a lot of entrepreneurs each week.
We might end up having 20 or 30 thirty-minute initial Zoom calls with founders who are pitching us to raise money.
You need to figure out how to quickly and efficiently decide during that first 30-minute call if you’re interested in scheduling the second call.
What do we look for on that first call?
Team, TAM and Defensibility
TEAM
The primary thing we’re sizing up is the founder (and often the founding team).
Is this the kind of person we want to entrust our LP’s money with?
We’re effectively signing up for what could be a 10-year marriage with the entrepreneur. We need evidence of a very strong ethical compass.
We’re looking to identify the “1% Founder” who is just wired differently than the rest of us.
They should have a fire in the belly and a compulsion to make this company work at all costs.
Above-average intelligence is table stakes. We’re also looking for high emotional intelligence and a demonstrated ability to convince others to follow them.
At the early stage of the entrepreneurial journey, we know that the product is likely to end up looking very different than what the founder imagines. But we need to have a high degree of confidence that this founder is going to keep pushing the ball downfield, through good and bad, and never ever give up.
TAM (or “Total Addressable Market”)
While the most important thing is for us to have an incredible “1%” team, we also need to ensure that the dragon they’re looking to vanquish is big enough to make the battle worth the effort.
We often meet really impressive entrepreneurs, but even if they’re successful on their quest, the size of the market just isn’t big enough to warrant supporting a large, successful company. Without the creation of a really big company, we won’t get the returns needed for our fund (see future blog post on why we focus on underwriting 50x returns).
When presenting your TAM, a top-down calculation starts with broad industry data (e.g., "The automotive market is worth over $2 trillion") and narrows down to your niche. While helpful for context, this approach often lacks precision.
A bottom-up calculation, on the other hand, starts with your specific product or service—multiplying key variables like pricing, potential customers, and adoption rates to build a realistic TAM based on tangible assumptions.
Investors prefer bottom-up TAMs because they are grounded in data and reflect a founder’s understanding of their market. Use top-down data sparingly to show scale, but always pair it with a solid bottom-up analysis.
Defensibility
Finally, in addition to an amazing team and large (and preferably growing TAM), we need to hear the entrepreneurs articulate how they’ll build competitive defensibility over time.
Warren Buffett said, “A good business is like a strong castle with a deep moat around it. I want sharks in the moat to keep away those who would encroach on the castle.”
We don’t expect very early (Seed or Pre-Seed) companies to have yet built up their competitive defenses. But it’s a bad sign if an early-stage company can’t think through how they’re going to fortify and defend the company against competitors as they grow.
As they start becoming successful, what’s to stop larger companies with far deeper pockets and more resources to simply examine their business model and reverse-engineer their offering?
Early-stage founders should give a lot of thought (and be able to clearly communicate) how they’re going to (eventually) build in defenses around the business.
Wrapping Up
That’s pretty much it for the first call with a VC.
If you’re able to express your incredible talent and market/founder fit, that you’re building a solution that addresses a big pain point in a large and growing TAM, and you have a plan to architect defensibility into your business over time, you’ll earn the right to that second call.
Join us on the journey,
Steve Greenfield
