They have:

"3. Sustainable competitive advantage. This is a really tough one that most start-ups don’t have, and you can’t just change strategies to get one. If your venture is not built off of some protectable and scalable technology, VCs won’t usually be interested. It is conceivable that in the right type of business you could build barriers to entry if you are a well-funded first-mover, but it is quite rare that that will suffice."

Nonsense: The author and UNC B-school people have been sitting too long in their small, dark offices with the door and blinds closed engaging in intellectual self-abuse imagining how things are. Instead, what is much closer to being true is:

For "protectable and scalable technology" ('secret sauce') for "competitive advantage", "VCs won’t usually be interested".

As a parody, for investors, secret sauce and a dime won't cover a ten cent cup of coffee. Some "protectable and scalable technology" and some customer 'traction' are not nearly as good as just some customer 'traction'!

Or, without knowing it, the investors believe in Markov processes: For predicting the future of the business, customer traction is as good as customer traction and secret sauce. More technically, the future of the business and secret sauce are conditionally independent given customer traction.

In particular, the investors will not do any competent or reliable expert technical review of any claims of any "protectable and scalable technology".

Why? (A) Actually investors do not know how to do or even direct such a review (they aren't editors in chief of peer-reviewed journals). (B) They make decisions quickly without the time of such reviews. (C) They see so few deals with important secret sauce that they choose to neglect any such secret sauce. (D) The big wins they see had little or no valuable secret sauce. (E) Secret sauce technology has a bad reputation as generalized, useless academic nonsense solutions looking for problems. (F) Claims about secret sauce investors can't evaluate can make investors feel inadequate, and investors like to feel that they are 'on top of and better than' the entrepreneurs and not anything like 'inadequate'.

Here in principle the investors are badly wrong; secret sauce can be fantastically valuable. In practice the investors are somewhat wrong. Still, the most successful investors are not very technical people (that's being generous) and are making money anyway.

If there is some powerful, valuable, difficult to duplicate or equal secret sauce, then there is a chance that the secret sauce will be the difference between just some good, early traction and a really solid, valuable business; in this case, good for the entrepreneur; but with the claims of secret sauce the investors will try not to be offended and try to look just at 'traction' anyway.

The article also describes "funding stages":

o "$1M early stage round to get to prototype or perhaps get first customers;

o "a year later, another round of $3-5M to test the business model and whether it can scale, milestones of $1M in sales or some of customers;

o "then maybe 18 months later, $5-10M to go BIG and try to position yourself for an 'exit' (sale of company or IPO)."

I don't think so!

So, my guess about the funding stages is:

(0) Pre-Seed Stage.

If there is no prototype Web site an investor can connect to and "play with", then the project is regarded as "just an idea" and "Ideas are easy and plentiful", that is, worthless. No chance of a check.

(1) Seed Stage.

The prototype Web site works, and investors can connect to it and evaluate the user interface and user experience. If everything looks good or promising, then maybe write a seed check for $25,000 to $1 million.

(2) Series A.

If there are users and the number of users per month is increasing quickly, and even better if there is some revenue, then write a Series A check for $1 million to $5 million.

(3) Series B.

If the 'traction' is growing like a weed on MiracleGro, and/or so are revenue and earnings, and if the M&A or IPO situation looks promising, then write a Series B check, maybe for $10 million to $20 million, or more in extreme cases or if the founders want to 'take some cash off the table'.

From all I can see, these are the criteria. They are simple enough that could teach a dog to do it in a weekend. My guess is that the criteria are what are wanted by the major limited partners. Since the major limited partners have no real control over some of the angel investors, the angels are free to have their own criteria.

Let's see: The article was from Duke, right? As I recall, there was a coed there with hots for the Lacrosse team? Are we getting a consistent pattern about the seriousness of Duke?