Key Factors Venture Capitalists Look For

10 Key Factors That Venture Capitalists Look For When Investing In A Business

Preparing to go for a funding round is an important milestone for any business. And, getting a venture capitalist to invest in your business is the most exciting prospect of all. However, venture capital is also the hardest kind of investment to get. VCs are known for being extremely picky. And they are right to be so. Venture capitalists invest millions of dollars for a business and they are always responsible for where they put their hard-earned money. Basically, if you cannot prove the worth of your business, no venture capitalist would be interested in offering an investment for your company.

If you have a great idea, with a little more work and an awesome pitch deck, you just might land an investment from a venture capitalist. A VC generally will try to scrutinize almost every aspect of your business. From early business success to the capacity of your team, here are 10 factors that a venture capitalist will look for in your business before making the final decision.

1. Presence of a great management team

A business cannot exist without people. So, when choosing members for management, select qualified people. It is great to have people who know how to run businesses and have proven their talent with previous businesses. Advisers are also a great addition to a management team.

But, having qualifications is not enough. A venture capitalist will want to see if your people are ready to work hard and keep going relentlessly. Startups are by no means easy to grow. So, the team should be willing to give their everything to grow their newborn idea into an empire.

2. Innovative product/service

The possibility of your product/service doing well in the market depends on its uniqueness. Is your idea something that has never been done before? And, are you sure that there will be a demand when you finally go into the market? Then, your idea will surely catch the eye of venture capitalists. However, having a unique product also comes with a lot of risks. So, before you pitch, try to analyze the market and figure out the demand for your business idea. This can be done by offering pre-orders, beta products, and so on.

3. Large market opportunity

The presence of a market opportunity is a major deciding factor for a venture capitalist. Most businesses that receive investments strive to solve problems faced by customers. So, before you pitch your idea, consider your market opportunity. If your idea has a large market, it is much more likely that a VC will invest in it.

Take for example the revolutionary company Squatty Potty which solved a health problem faced by millions of people around the world. Squatty Potty revolutionize the way people poop. Although the idea seems funny, the market opportunity was large. After gaining venture capital and developing further, this company stands close to a whopping $30 million in sales this year.

4. Intellectual property

For businesses, having intellectual property rights is very important. This is especially true for startups that are trying to bring a unique product/service to the market. If you own a similar startup, make sure that you have sorted out your intellectual property. It includes all the patents, copyrights, trademarks, domain names, etc. in your company. If the intellectual property belongs to someone else, make sure that you have proper permissions to use it. Having issues regarding intellectual property rights is a major turn off for any VC.

5. Early traction achieved

While having early traction is not a must for a startup looking for venture capital, it can really work in your favor. Early traction can be an impressive number of sales you have done, pre-orders from customers, beta products, testimonials, strategic partnerships, etc. These will stand as proof that you have demand in the market. And, venture capitalists love to invest in businesses that have proven their worth.

6. Ability to deal with potential risks

VCs will specifically be interested in your capacity to deal with risks. Some risks that could affect your business are team experience, market opportunity risk, competitive risk, market entry strategy risk, technology risk, environmental risk, and so on. Have you already taken steps to minimize or eliminate these potential risks? Then, you have an upper hand compared to other businesses that might be pitching to the same venture capitalist.

7. Partnerships

Great partnerships bring great results. So, if you are partnered with another business that can bring a lot of value, awesome! Don’t forget to emphasize that fact in front of your potential investors. It will impress them and they will most likely consider you as a worthy business to invest in.

8. Having a great business plan

Before you try to reach out to venture capitalists, make sure that you have a great business plan. This plan should include everything you are planning to do in the future. However, you don’t have to strictly follow this plan. You can always come back to it and add modifications.

9. Realistic pro forma

Pro forma is a report where you include a prediction of future revenues and expenditures of your business. This pro forma is something venture capitalist always expect. They are investing money to get that predicted profit. So, a pro forma is just as important as pitching your product. However, your pro forma also has to be realistic. If you started your business a month ago, you can’t predict to have a valuation of $2 million in two years.

10. Interesting pitch Deck

At the end of the day, it all comes down to your pitch deck. Your pitch deck is the presentation you do about your business. This should include everything about your business idea, product, and deal. You get very less amount of time to convince a venture capitalist to invest in your business. So, you need to give your all to this.

When you are doing the pitch, express your enthusiasm. Show that you are excited and will not mind spending your time 24/7 to grow your business. That way, VCs will be interested in you as a person capable of bringing them worth. Remember that this is the only chance you get to pitch your business to that venture capitalist. So, dress nice, and try to give a great first impression.

Bottom line

Getting venture capital for a startup is hard. You will probably have to pitch your business to a few investors before even getting close to securing an investment. However, if your idea is good, and you have these 10 factors under your belt, you have a good chance of getting noticed by a venture capitalist. So, don’t give up.

We wish you all the best for your next pitch!

Leave a Reply