How to Judge Startups: A Conversation with DN Capital Founder Steven Schlenker
By: Harvard Undergraduate Capital Partners
Tags: Venture Capital, Startup Lessons, VC, Startup, Investing

By Priyanka Kumar

We recently sat down with Steven Schlenker, co-founder of DN Capital, in preparation for our newest round of the Innovation Fund, to discuss what criteria to look for when analyzing a startup. These are a snippet of his thoughts:

Start with the 5 T’s: Team, TAM (total addressable market), tech, traction, and terms:

Team

Where do they put the team slide? If it’s near the back, then they want people to focus on tech, not team. If they put a team far forward, then they know they’re

Is the team well balanced? Someone technical, someone else business. Someone on the GUI side?

Look at ownership. How are they thinking about it?

Don’t want too many cooks in the kitchen — want 1 person who is taking leadership. One person 35%, and other two getting 22%. There should be a clear CEO. Everyone should have defined roles. This means they are talking about building a startup.

Diversity — You don’t want groupthink among the founding team.

You can tell whether people are focused on building a business or the desire to be entrepreneurs.

Some people have ideas of what it’s like to be an entrepreneur.

Do they have the personality to see from deep times?

Will they listen to advice? If they say “oh yeah we thought about that but ignored it” then that’s a bad sign: they may be too embedded into tech.

Are they building an individual thiefdom or a company that’s sustainable that may require skillsets they don’t have?

How do they think about building out a sustainable business?

What are their long-term ambitions?

Are they thinking about the on-boarding process for new employees?

TAM

What’s total market size? What’s accessible size?

Did they build this market bottom up or top down? Or both?

Are they reasonable?

Are they realistic about what share they can get over their time period?

Are the established customers willing to accept technology from startups?

How realistic are they about the acquirers out there?

What does the competitive landscape look like? Do the existing players care? Are there holes in the existing pipelines?

Manufacturing costs? Cost curves? How much volume do you need to produce for low costs? What potential disruptions during supply chains do you see?

Tech

How do they explain it?

If they are using technical jargon, have them tell it as if they were telling their grandparents? Can they describe it in lay man terms? If not, they may not be able to sell it. If not, they may not understand it. Not understand why the customer is buying.

Can they describe value prop of their product? How different?

Who is the buying agent and why do they care about the technology?

Is this solving the needs of an organization or the needs of an individual?

What’s defensible and unique: have they thought about what else is out there and what might come after them? How do they think about their IP and how defensible it is? Have they thought about who will come after them? How defensible is there IP and are they aware of IP trolls?

Are there products fitting a product gap, or are they doing something existing competitors already do.

Even if they do not have traction, they should think about how they will get traction. What roots will they to go to market? Direct? Fields? Lite product that will become an enterprise? Freemium model for 30 days? Will they talk about how long it will take to get in the front door, how long does it take to onboard?

Have they thought about marketing channels? Through Google, social media, or above line advertising?

Unit economics? What is the likely payback time period and what is the lifetime of the product?

What are the barriers to entry for other competitors? Is it supplier driven or buyer-driven?

Have you thought through who are your friends and who are your enemies? Who will benefit if you are successful especially big players ? Who could be potential partnerships?

Who could be potential partnerships? How will they go about customer acquisition strategies?

Terms

What are the milestones they want to get to before the next fundraising round?

Are they being realistic on exit long term potential?

What commitment are they giving? Part-time? Full-time? Are they making an economic commitment?

How do they pitch how much money they need?

Are they realistic about how much money they can realistically expect from competitors based on everything?

Startups in the COVID Era

How do you among engineers and salespeople remotely?

Is your salesforce organized geographically which is harder for hone?

Are customers going to be willing to buy from online demo rather than in-person?

How are you going to handle customer support in a remote era?

How are you benefiting from COVID? How are you hurt? How sustainable is your product after COVID is over?

Commonly Missed Red Flags

Look for team balance, make sure they’re not interrupting

Top down v bottom up, make sure they are considering market.

People who pitch business model and don’t talk about onboarding or efficiency process means they don’t think about it as a business and its only very high-level understanding.

Ask them about how different they are from there competitors and ask them to identify them.

How to Interview:

5 minutes to get the story across. 5 minutes from a diverse set of questions from 3 individuals.

Have 1 person on the team focus on competition. Have one focus on market size or team. Then you don’t have interviewers asking the same questions!!

If you are the market size, ask about What market are YOU addressing? How are you getting there? Who are the competitors? How are you different?

If you are the go-to-market, how do you attract customers? How do you structure sales?

If you’re the person asking about team, why is your background the great one to win? Who is doing what in your team? What skillset do you have to leap to the next level?

The best pitches are the least complex. The most direct to the point. “This is what we do. This is why we’re the right team to do it. This is what’s different.” The application might look sparse, but you can sense: it’s something that will take off

The Value of Judging