This document discusses how early-stage VCs estimate the chance of success and value of startups. It explains that VCs do not value companies based solely on revenue multiples, but rather on the ideal outcome potential multiplied by the odds of success. It breaks down how VCs estimate the chance of winning by assessing key risk areas like product/market fit, competition, and team strength. It warns against common startup mistakes like focusing on the wrong risk areas or regressing in areas that were previously de-risked. The document advocates that startups identify their biggest risks and focus their efforts on mitigating those first to improve their odds of success and valuation.

1. LEO POLOVETS
GENERAL PARTNER AT SUSA VENTURES
#saastrannual
De-Risking Your Startup

2. De-Risking Your Startup
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Background
Me: software engineer turned VC.
• LinkedIn ’03-’05, Google ’05-’09, Factual ’09-’12.
General Partner at Susa Ventures since late 2012.
• $75m under management.
• ~50 investments.
• Seed investing in (mostly) B2B startups. Our focus is on strong
long-term competitive advantages like network effects, proprietary
data, and/or economies of scale.

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Common Misconception
“If I hit $2m ARR, I'll be able to
raise a nice Series A.”

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SORRY,
NO.

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Reality
Early-stage VCs invest based on
ideal outcome potential and odds
of success — not revenue
multiples.

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The Value of Your Company
Value ∝IdealOutcome x ChanceToWin

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Example
• Ideal outcome: If you win, company will be worth $1b.
• Your team + idea = 1% chance to win.
• Expected value of company = $1b x 1% = $10m.
• Seed valuation = $3m (time discounted).

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Example (cont.)
Today
Next year
ARR Chance to win Expected company value
$0m 10% $100m
$1m 10% $100m
$2m 10% $100m
$2m 4% $40m
ARR Chance to win Expected company value
$0m 1% $10m

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How VCs Estimate Your Chance of Winning

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Chance of Winning is Based on Key Risks
• Can you hire a great exec team?
• Can you find product/market fit?
• Can you differentiate enough
from the competition?
• etc…

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Each Risk Area is Ranked along a Spectrum
Product/Market Fit Risk
Risk Level Example
Very High You think/hope/believe people will want to use your product.
High You have verbal interest or LOIs from potential customers.
Medium You have unpaid pilots.
Low You have multiple paid pilots.
Very Low You have multiple prepaid annual contracts.

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Each Risk Area is Ranked along a Spectrum
Short-Term Competition Risk
Risk Level Example
Very High Tons of strong competition.
High Tons of weak competition.
Medium Some competition, and you’re weakly differentiated
Low Some competition, but you’re strongly differentiated
Very Low No competition + high barrier to entry (which you have crossed).

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Risk Levels → Probabilities
Risk Level Probability of Success
Very High 20%
High 35%
Medium 50%
Low 65%
Very Low 80%

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Value of Your Company
Market Size
x Probability of Success (product/market fit)
x Probability of Success (short-term competition)
x Probability of Success (hiring great exec team)
x …

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Seed Stage Valuation Example
$1b (valuation if company is successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m

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Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m

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Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
Mistake:
Spend most of your seed
round on adding more
great execs to the team

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Startup Mistake #1: Focusing on Wrong Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
After:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m (valuation unchanged)
Mistake:
Spend most of your seed
round on adding more
great execs to the team

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Startup Mistake #1: Focusing on Wrong Risks
Real-world examples:
• Strong technical team spends seed round on
building product instead of proving they can sell.
• Company that’s in a crowded market makes no effort
at establishing differentiation.
• Founders with zero management and hiring
experience make progress by themselves, without
expanding the team or showing they can be leaders.

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Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m

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Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
Mistake:
You find product/market
fit, but it’s in a very
crowded space.

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Seed Mistake #2: Regressing in an Area
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
After:
$1b (valuation if successful)
x 0.80 (very low product/market fit risk)
x 0.20 (very high competition risk)
x 0.80 (very low exec team risk)
x …
= $9m (valuation drops!)
Mistake:
You find product/market
fit, but it’s in a very
crowded space.

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Seed Mistake #2: Regressing in an Area
Real-world examples:
• Original pricing model is too aggressive, new pricing
works but shrinks TAM by 10x.
• Founders make bad hires, showing that they can
hire in a competitive market, but they can’t hire well.
• Pre-sales validate a strong market but team cannot
fulfill customer demand, demonstrating weak
execution skills.

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Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m

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Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
Ideal path:
Primary focus on product/
market fit, secondary
focus on higher
differentiation.

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Best Practice: Focus on Biggest Risks
Before:
$1b (valuation if successful)
x 0.35 (high product/market fit risk)
x 0.50 (med short-term competition risk)
x 0.80 (very low exec team risk)
x …
= $10m
After:
$1b (valuation if successful)
x 0.80 (very low product/market fit risk)
x 0.65 (low competition risk)
x 0.80 (very low exec team risk)
x …
= $30m (3x higher!)
Ideal path:
Primary focus on product/
market fit, secondary
focus on higher
differentiation.

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An Aside: Series A Revenue Targets
If revenue doesn’t matter, why
do most Series A investors
want to see $1m-$2m ARR?

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An Aside: Series A Revenue Targets
$1m-$2m ARR is interesting because it
usually indicates you’ve figured out
product/market fit and a growth channel.
VCs are excited because you’ve figured
out product/market fit and a growth
channel, not because you have $X ARR.

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Homework: Identify Your Key Risks
1. Carefully reflect on every imaginable risk area: product/market
fit, short- and long-term competition, current team, ability to
hire, ability to sell, market size, government regulation, etc.
2. Do an honest self-assessment. Which areas are you weakest
in?
3. Ask investors, advisors, friends, cofounders, etc. to share
what they think are your weak areas.
4. Useful thought experiment: if you fast forward 5 years into the
future and find out your company failed, what would be the
reasons it failed?

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Homework: Focus on the Right Risk Areas
1. Ignore risks that don’t apply to your stage. (E.g.
whether your team can scale from $10m ARR to
$100m ARR is irrelevant if you’re at $100k ARR.)
2. Focus on the biggest risks first. Moving from a 20%
to an 80% chance of success in some area is a 4x
improvement. Moving from 65% to 80% is barely an
improvement.
Tip: In many areas, an easy way to reduce risk is to
surround yourself with great employees, advisors, and
investors.

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Startups are Like Triathlons
Triathlon = Swim, Bike, Run.
It doesn’t matter how great you are at cycling and
running if you can’t swim. Learn to swim before you
upgrade your bike.

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Thank You
Leo Polovets
https://codingvc.com/saastr-2017
leo@susaventures.com
@lpolovets