Fundraising is a critical business strategy, and if you will be relying on venture capitalists to inject money into your company, it definitely helps to know what they base their decisions on. So, what do venture capitalists look for when investing in startup companies? Here are three factors most often considered by VCs.
1. The Management Team
No venture capitalist will be willing to invest in a start-up or early-stage business if they are unconvinced about the acumen and passion of the management team. In some cases, a VC may decide that while the business has potential and is worth investing in, the CEO must go. However, most evaluate the management as a whole, even sometimes emphasizing it over the product.
In particular, here are some questions that tend to go through a VC’s mind when investing in startup companies:
• Does the team have the ability and skill to execute strategies that take the venture from its start-up stage to a real business? Unless the team can be trusted to lead from the front, attract talent, nurture the business, and steer it towards the established vision, it would be risky to pump millions into the venture.
• Does the founder have it in him/her to take the company through ups and downs without throwing in the towel? Grit is a desirable quality in a founder, and in its absence, there is a possibility that investors will end up losing instead of winning.
• Does the team make decisions grounded by facts, that is, is it intellectually honest? After all, they will be handling the working capital and can use them in a number of different ways. If VCs detect that the team is motivated more by personal prosperity than business success, they will be unwilling to fund the business.
2. Has the Business Gained some Traction?
Venture capitalists investing in startup companies or early stage ventures check how far the business has come since its launch. Momentum is an important factor that gives VCs assurance that good things lie in the future, and they may choose to define it in different ways. For some, it may mean an increase in the number of users; others may assess in terms of revenue growth or business development deals. That’s why it makes sense to see VCs early on so they can get an idea about your alpha product and conclude how it may possibly evolve over time.
3. Market Considerations
One of the common factors that VCs investing in startup companies gauge is the market type and size. Here’s where it can get a bit tricky: a majority of VCs invest with the goal that your company will grow in the future, and consequently, they are partial to large markets. VCs who are not particular about market size will need to be convinced that you can create disruptive innovation or your product is the ‘next big thing’ in a small/niche or undefined market. Think Facebook, Zynga and AdMob.
If you have a great concept you’re trying to get from the drawing board to the marketplace, you can have all the ambition in the world, but you won’t get very far without funding. Do you know what venture capitalists look for when investing in startup companies? You can find out by contacting Activation Investments today.
Tags: Angel Investors, Angel Investors versus Venture Capitalists, Startup Companies
Categorised in: Angel Investor ServicesFebruary 8, 2017 3:31 pm