An Inside Look at how a VC Evaluates Startups

by Tweed on September 20, 2011

As a young VC trying to understand the inner workings and financing of startups, my first year has been crammed full of reading tech articles, books, Hacker News, Quora entries, and watching Ustream and YouTube clips.  While there is a large amount of helpful information for entrepreneurs seeking funding, I haven’t found many thorough descriptions of what goes on from the VC side when evaluating companies.  Last week, Apsalar announced their funding round, and I thought it might provide a good example of how we go about looking at a company from initial contact, to doing due diligence, to solidifying an agreement on working together.  I cover the first two parts of this process (namely, initial review and due diligence) in this post and will follow up in the coming weeks with a second post regarding the negotiations and final structuring of our investment.

Our first contact with Apsalar came through an entrepreneur whose previous company we had invested in.  He served as an advisor to Apsalar and told us about the company because he felt there might be a good fit.  We had an initial call with Michael Oiknine, the founder and CEO, where it quickly became clear that he knew the space and appeared to be on to something big.  That led to a series of further calls and the proverbial pitch deck landing on my desk.

In any given quarter we are typically looking at upwards of 80 companies that have been referred to us by people in our network.  Given the volume, we try to apply a simple rating system to help us consider which startups are a good fit with our investment focus.  After doing an initial scan of pitch documents, I generally rate companies on 10 rather loose criteria as a litmus test to see if there is a good fit:

  1. Early Stage (most of our investments fall under Seed/Series A/Series B)
  2. Geography (we spend a lot of time with our startups so the focus is on Silicon Valley)
  3. Industry Fit (is it a market we understand and can give helpful assistance in?)
  4. Competition (size, strength, reach, and technology differences of other industry players)
  5. Business Model (has to be one that we believe in)
  6. Momentum (user traction, partnership agreements, and industry recognition)
  7. Market Size (focus on the size of the total addressable market for the problem being solved)
  8. Defensibility (this can be IP, specialized skills/knowledge requirements, any unfair advantage)
  9. Team (what are their past experiences, domain knowledge, and group passion/chemistry?)
  10. Bill Dodds Wow Factor (named after a Thomvest veteran, this is the “did it have that additional ’umph‘ that gets you excited about the company?”)

While this list isn’t perfect or comprehensive, it generally allows us to quickly test if there is a good fit with Thomvest.  There are exceptions to the rule, but going back over a year’s worth of prospect data, there has not been an investment we have done that hasn’t scored in the top tiers (8-10).

It’s rare that a company gets full points on this scale for an early stage startup, and Apsalar was one of those rare cases that scored a perfect 10.  The team was raising their first institutional round, is located in San Francisco, and is doing mobile and software: three quick points on our simple litmus test.  The mobile analytics space seemed to be competitive, but no one had done effective mobile behavioral targeting, giving the company a first-mover advantage.  We were able to analyze the business model and felt good about the strategy going forward.  Apsalar’s momentum was the hockey-stick you hear about but don’t often see.  The team had worked together for 10 years doing behavioral targeting online with their prior company that had a successful exit.  This gave them the skills in addition to protectable IP around the methods for their mobile code.  The Bill Dodds Wow Factor is a bit hard to quantify, but it can come from ridiculous traction, beautiful design, an entirely different take on how to do something that we wouldn’t have thought of, and so forth.  Apsalar’s growth ramp was stunning, the visualizations of their data were slick, and the way they wanted to implement behavioral targeting had a unique approach that we hadn’t seen.

We knew that investing in Apsalar was going to be very competitive, with the company already receiving term sheets from other investors.  We crammed the review process into one week, in what can only be described as the VC equivalent of a hack-a-thon. More than a few sleepless nights were filled with solidifying our market overviews and forecasts, cranking out financial models to test startup assumptions, and doing back-channel reference calls.  We like to know a great deal about the people we are considering working with, and usually spend a good amount of time sifting through Linkedin, Quora, Twitter, and Google to get to know them better.  Linkedin lets me see who we mutually know and can lead to good reference checks.  The trail of a CEO’s Quora account history shows how they are thinking about their business, the types questions they spent the time to answer/upvote, and feedback that their opinions are receiving in the tech community.  Their Twitter presence gives a glimpse into topics they generally cover and what kind of audience they tailor messaging toward: some use it as a networking tool, others chronicle their startup’s progress, and others transcribe notes about things they find interesting.  A simple Google search can yield some surprising findings as well.  We found a defunct blog that the CTO wrote circa early 2000s that covered everything from book reviews to deep packet inspection.  It gave us a sense for the brainpower behind the operations and led to some good topics for discussion once we met.  We also found an old blog from the founding team’s first company that detailed their unpleasant experience with another venture firm.  It allowed us to focus around the specific ways we partner with startups to reassure that history wouldn’t be repeating itself if the Apsalar team chose to work with us.  Michael seemed to appreciate the efforts we had put into assessing the team and their approach. This helped us move the discussions further given the competitive dynamics involved with the financing round.

After getting a good sense for Michael and the Apsalar team, we met up at their offices in SF.  The chemistry was great, our first hour-long meeting was very informative, and there was a great balance between really explaining what they were doing and the vision going forward.  Don Butler, one of the Managing Directors here at Thomvest, and I walked out of that meeting feeling very positive on where they were headed.  Once we shared our experience with the rest of the team, the real work began.

The next phase of diligence for us usually includes coming up with a comprehensive list of questions and asking references for feedback.  I try to generally think of reference checks in 3 categories: Personal, Market Landscape, and Company-Specific.


We wanted to find out how good the team is, how they have behaved in certain situations, and what it is like to work with them.

Who: Contacts from the CEO, individuals in our network, and former team members and investors

Why: The team is key, and if they sued their past investor or bailed on the company as things were going south we would rather find out before jumping into a long-term partnership with them.

For Apsalar: We had meetings with two well-respected angel investors that had invested their own funds in the company, spoke with another few that knew Michael personally, and the checks all came back positive.  In their prior company Kefta, the management team stuck through thick and thin until the company got to the point of being acquired.  This showed us just how resilient the team was.

Market landscape

We like to speak with individuals who a) can tell us about how they see the industry evolving, b) have visibility into the competition, and c) can tell us where they plan to spend their dollars if they are potential customers of the company.  This generally answers some of the bigger questions regarding how large we think a potential startup can become and what challenges it will face along the way.

Who: Startup CEOs, industry analysts, research articles, and industry luminaries

Why: We aren’t operating countless hours day-to-day in every industry, but there are numerous individuals we trust who are.  Some of the more interesting fact checks have come out of conversations with them.

For Apsalar: I attended a mobile conference and spoke with various publishers and experts.  One of the individuals I was fortunate enough to get to know was Trip Hawkins, the founder of EA and Digital Chocolate.  Given his long history and current role in both gaming and mobile, he was very insightful and gave me some great feedback on mobile analytics and where he saw the industry going.  Many of the publishers Michael gave us had booths at the conference, and I was able to ask them what analytics services they used and where they thought the future of mobile advertising was headed.  I kept a running Dropbox of all the mobile advertising and gaming research we could find along the way, which our team was also evaluating.


How is the product, the customer service, where are the gaps in product/market fit, if they were running the startup how would they adjust the strategy, what is the technology differentiation?

Who: Customers, technical experts, and industry contacts met at various mobile conferences

Why: This is the bucket that we emphasize most heavily, specifically when speaking with customer references.  We have had some calls where the customers can’t stop raving about a product even after we try to get off the phone…That gets us excited and has led us to be a part of some great companies along the way.  We also don’t always have the expertise to do a deep analysis on the technical feasibility and sometimes bring in someone who has extensive knowledge of a particular space or technology.  Sometimes these experts give strong reviews coupled with a “do you mind if I co-invest alongside you…”  That acts as a positive signal and gets us excited about a company.

For Apsalar: Each publisher whom we spoke with put Apsalar’s offering above the many competitors they had benchmarked against, and were very impressed with the speed at which they were able to onboard the analytics offering.

In order to reduce eye fatigue, the next post will discuss how we came to a decision as a team, the details of how our negotiations went, and how we closed on a group of investors to work with as part of our investment syndicate.


  • Benjamin Dyer

    This is an insanely useful post, thank you for sharing. Bookmarked for re-reading when we start to think about funding for our business.

    • Anonymous

      Appreciate the kind words Benjamin

  • Browsemob

    I truly appreciate the glimpse behind the curtain.  As a 1st timer, the process seems ambiguous.  I am looking forward to your subsequent posts.

    I have a couple questions:

    By not mentioning your unsolicited deal flow, is it safe to assume that it only gets considered by sheer accident?  Meaning, if you happen to read something in the subject line or first 2 sentences that catches your eye, while waiting for the email to move out of your inbox?  What % of companies funded, if any, came to Thomvest that way?

    How does already having a term sheet change the VC mindset?  In the Apsalar case, did the introduction to the company come before they had their first term sheet?  If not, where in the process were you when you found out?  It clearly changed the velocity of the process.  Generally, in the event that there are 2 almost equal-scoring funding candidates, but the slightly lower scoring company has a term sheet (maybe more), which gets funded?

    • Thomvest Ventures

      Hi Browsemob, appreciate the positive feedback and I can understand that the process seems unclear at times. 

      The unsolicited deal-flow probably should have been included (sounds like I have a future blog post to write) and you don’t need to know someone at Thomvest to be considered. One of our highest quality sources is AngelList where we reach out to companies to request intros. We led an investment in a company called FlashSoft that we found through the site, and have looked at a multitude of companies that we meet at conferences, demo days, etc. I also receive a number of unsolicited emails that are clearly batch shipment attempts to get some interest. These are often not of a high quality and don’t receive much of our time (unless they are well thought out and clearly were meant for us specifically).

      In terms of having another term sheet, while it may be a positive signal that another company believes in your startup it doesn’t change our mindset very much. What it does do is put a clock on the financing round and requires that you come to a decision quickly if you want to give a competitive offer. We have had the situation where two competing companies score highly but perhaps one has a term sheet, rarely has this made a difference it simply meant that we had to break up our team to tackle two different and simultaneous due diligence processes. Remember too that the scoring system is simply a first past test that answers the question of whether there is a good fit with Thomvest and if we should spend the time doing deeper diligence. I hope this answers some of your questions, I will address your others in the next post. 

  • Chris DeVore

    Great post, Andrew – we’re seed investors in Apsalar, my partner (Andy Sack) was their champion on Kefta as an EIR at SoftBank and another of our portfolio companies (Zipline Games) is one of the distribution partners who can’t say enough good things about Michael + co, so I can verify from my own experience that your instincts are right on. Glad to be working with you on it!

    • Thomvest Ventures

      Thanks for the comment Chris! Given your experience and background it is good affirmation that this jives with your thinking. Michael has told us great things about both yourself and Andy, it also sounds like Zipline is doing some big things and glad that they were able to partner. We should grab drinks next time you are in the Bay. 

  • Horatiu Mocian

    Hi Andrew,

    This is great insight; as you said there are many blog posts written by VCs for entrepreneurs, but very few written by VCs for (aspiring) VCs.

    For researching the social media / web presence of a startup’s team, do you use some automated tools? If not, would you use a tool that aggregates the social media profiles of a person (I am working on a such tool).


    • Thomvest Ventures

      Hi Horatiu,

      Thanks for the positive feedback. 

      We have seen a few automated tools to do this, but I still do everything manually. Let us know when your tool comes out and I can take a look. 


  • Josh Breinlinger

    Just out of curiosity, do you actually spend the time to score / rank companies that you know are <8 on your scale? 

    • Horatiu Mocian

      I think that they eliminate the companies that obviously are not a fit for investment (too early stage, not the right team, wrong industry, not the right market). And others (like Apsalar) look like winners from the start. But probably there are a lot of companies in between, in a grey area, for which they need to compute this score before having a clear idea on whether to further pursue an investment, or not.

    • Thomvest Ventures

      Hi Josh,

      We actually spend the time scoring every company (the 1-10 rank graph in the post) and keep a record of every prospect that we have had a discussion with. It lets us look at the startups we have spoken with over time and analyze how we are doing quarter-to-quarter. 

  • Anonymous

    Sounds to me like you did a LOT of work but that I would have done a ‘pass’. 

    Why?  Largely you were “digging in the wrong place” and looking at criteria not much better than tea leafs. 

    Three big problems:  (1)  Potential.  Behavioral targeting in the ‘mobile space’ looks to me like at best only a ‘base hit’.   (2) Targeting is mostly not a problem in business, computing, software, or computer science but a challenging problem in applied math with some advanced prerequisites, but your review did not consider such things at all which is like investing in a new drug without considering safety and efficacy.  (3) My view is that for targeting, ‘behavioral’ has poor potential at best and will soon get overwhelmed by much more effective approaches; the main problem is a lot of bad, ‘noisy’, data and not nearly enough good data.  In particular, what the current customers think should cause a ‘pass’ if bad but should not have much weight if good because the customers just are not well informed on the ‘space’ and what is coming.

  • Joe Zhou

    Hey Andrew,

    I came across this via Hacker News and realized that I had applied to your job posting for an Analyst on CalJobs. I am a great fit for Thomvest. I should have mentioned Hacker News on my cover letter! Please find my resume from your stack and give it a second look.

    I know this is a bit of an awkward platform to do this but I think there is something to be said for tenacity in this industry.

    By the way, I think your scoring system is a brilliant idea. I view it as an amazing feedback mechanism. Not only for yourself but imagine a year or more down the line, you put all your scores into Excel and then put the referral was from (, investor network… etc) and any other data. Then look to see if you can find indicators or hot spots that can help make future decisions easier.


    • Thomvest Ventures

      Hi Joe,

      Thanks for reaching out through our blog. We did see your application, but we actually haven’t followed up with any applicants yet as we are still in the collection phase of things and gearing up to do interviews. You are ahead of where I was a year ago (hadn’t ever been to HN). 

      As for the Excel, you are right on and that is how we currently track and analyze sources. For us pivot table-loving geeks it gives some awesome data to slice and dice. 

      Appreciate your comments and look forward to following up,


  • Mirko Buholzer

    This is great insight, love this post. This gives finally puts some light into the VC blackbox! Looking forward to the next post. 

    • Thomvest Ventures

      Glad you found it helpful Mirko, thanks for the feedback.

  • VentureArchetypes

    Nice job Andrew, this is a keeper for future reference.  What I like about you guys– based on the startups I’ve referred over to you over the years–  is that you: a) are typically pretty responsive; and b) usually give at least some feedback.  While it’s never fun to get a “no”, these bits of feedback can be incredibly valuable and help shape the model / pitch for future VC outreach.  Keep it up.  Nathan

  • Thomas O’Hearn

    This is great stuff for a new startup person to take note of. I’ve started a network at for veterans who are currently enrolled in marketing programs, or recent graduates of, to help them connect with brands and those looking for volunteer marketing support. Makes for a good trade, good service for networking and references.

    Anyway, initial reaction has been good and I’ve wondered at what point I should go look for investors or think about that step of the game. I have big dreams and plans beyond just working with veterans, but they’ve proven a good base of support initially. Enough for a foothold. 

  • Designs Review

    Thanks for your Advice Andrew. It is way hard for a startup to understand that at one point bootstrapping cannot take it ahead.

  • Lawn MowingOnline

    Let’s see how we rank:
    1.  Early Stage:  currently bootstrapping, +1
    2.  Geography:  office in the Midwest… is that a -1?
    3.  Industry Fit:  no idea 
    4.  Competition:  no one is doing what we’re doing, +1
    5.  Business Model:  not sure 
    6.  Momentum:  it’s there, and we rank #1 on Google, Yahoo, etc for “order lawn mowing”.  +1
    7.  Market size:  huge, every lawn in america.  +1
    8.  Defensibility:  not sure
    9.  Team:  me.  +1 :)
    10.  Bill Dodds Wow Factor:  …. don’t know, but a lot of our customers think we’re the best thing since sliced bread.

    A lot of +1s, that’s a good sign.  

  • Steve Schlenker


    We are participants with you in the most recent round of Apsalar, and I would add one thing that we have on our own check-list at DN in addition to many of the categories you list is “quality of co-investor.”  Building a syndicate that not only has complementary skills and networks when times are good, but which can function cohesively when times are bad, can mean the difference between avoiding pitfalls that every start-up eventually encounters or being consumed by them.

    We at DN Capital are really pleased to be alongside yourselves, as well as the team from Battery Ventures, in helping Michael et al at Apsalar build a great company.

    • Thomvest Ventures

      Hi Steve,

      Thanks for your comments. We are including the quality of co-investors and building a syndicate in the second blog post coming shortly and agree that these are two key pieces in the funding process. In that regard it is a pleasure having yourself, DN Capital, and Battery as partners and look forward continuing to help Apsalar grow!