What Venture Capitalists Look For in Startups

What Venture Capitalists Look For in Startups

Securing venture capital is one of the many ways startups can take the next step toward long term success.  What most of these startups fail to understand is that obtaining these funds is an achievement few entrepreneurs accomplish.  Venture capitalists look for a lot more than an interesting idea or a few early sales. They want to know every detail of a business and entrepreneurs need to be ready to provide them with the information they seek.  

There are four main areas of an entrepreneur’s pitch that must be flawless in order to secure funding.  These categories are the team, product, market, and revenue potential.

The Team

Many individuals believe the idea is the backbone of a successful business.  However, this assumption could not be farther from the truth. The core of any profitable startup is always the team putting the idea into practice.  It is critical at the early stages of a business for all the team members to possess the skills necessary to create the product, enter the market, and help the company grow.

Furthermore, venture capitalists want to see a cohesive, engaged, and passionate team.  They do not simply look for the most qualified individuals within a startup. Rather investors want to see a united front that promises to work towards future success.  

Ultimately there are three criteria venture capitalists will analyze in order to assess the ability of a startup team.  The first is that all the members must be talented. There is little room in emerging enterprises for unneeded personnel.  Second, venture capitalists want to see open communication among all members to ensure a trusting environment. Lastly, they must see evidence that the team is willing and able to adapt in times of difficulty.  All successful businesses have the ability to pivot when needed. Venture capitalists want to see entrepreneurs who can realize when changes need to be made and execute the proper plan of action.

The Product

Venture capitalists want to see projects that are innovative by design and have a high potential for growth.  These products should solve a real problem within society that a great number of potential customers are facing.  Also, the way the product will be developed on a large scale and how it will be brought to market is essential information venture capitalists need to determine a fair investment evaluation.

The Market

Many startups have great products and great teams, however there is simply no need for them in the market.  Another problem entrepreneurs might have is that they know little of the size or dynamics of the market they are entering.  The size of the market is critical because it tells venture capitalists the growth potential of a business. Furthermore, without proper market research startups will also lack the information needed to understand their competition.  This knowledge is extremely important for venture capitalists because they want to know how a business is unique when compared to its competitors. Lastly, investors often look to see if a startup can enter multiple markets in the future, thus maximizing its potential for growth.

Revenue Potential

There is no doubt venture capitalists have seen pitches regarding businesses with very similar products.  However, there is always one differentiating factor between these enterprises that catches the eye of the investors.  If one company brings in more revenue than the others, that company immediately becomes more attractive. There are other metrics upon which venture capitalists determine their evaluations; however, revenue stream is an easy way to analyze the potential success of a business.

Venture capitalist success stories only come when the best deal is possible for both parties.   For some businesses, VC funding is not the right fit and have the means to be successful on their own or simply can not grow large enough to secure a massive investment.

Ultimately, many entrepreneurs fall into the trap of window-dressing their businesses in order to impress venture capitalists.  They should instead be focused on building an effective team and securing a steady revenue stream. Focus on the success of the business first and then look for possible investment.

Sources

El-Serafy, R. M. (2015, May 24). What Investors Look For When Evaluating Your Pitch: 

Flat6Labs CEO Ramez M. El-Serafy. Retrieved June 19, 2019, from https://www.entrepreneur.com/article/246587

Petch, N. (2017, January 08). What Venture Capitalists Look For When Investing In A Startup. 

Retrieved June 19, 2019, from https://www.entrepreneur.com/article/287509

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