What do Venture Capital Firms Look for before Investing in your Startup?

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It is getting competitive in the startup ecosystem. Innovation has no limits and entrepreneurship is an x-time job where you can spend an “x” amount of hours working while x approaches infinity.

One of the main areas in which startups are facing difficulties and tough competition is fundraising. Funding resources are increasing in numbers but are getting harder and harder to attract and/or satisfy. Venture Capitals are one of these funding sources, and this article is trying to give you some insights into how you can actually attract the attention of a Venture Capital and make it to their portfolio.

What is Venture Capital?

Venture Capital firms are of great advantage for startups and early-stage businesses as they help not only in funding your business and opening new doors for new opportunities. 

Venture capital (VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth.

This definition is provided by Wikipedia, but have you wondered about how venture capitalists (VCs) select entrepreneurs and/or about their acceptance criteria?

How to approach venture capitalists (VC)?

Actually, approaching and attracting venture capitalists is a no-easy task because it requires a lot of effort for multiple reasons; for example, every Venture Capital firm has its own perspective and requirements that might be challenging to meet, you might need to have already raised a certain amount of money to be accepted, you are in competition with the best startups out there, among others.

This is why many entrepreneurs resort to contacting only angel investors, especially when they are raising capital in their early stages.

However, if you think you are in a reasonable phase in your journey and that you might have this chance, check out these basic initial steps.

Steps to take when approaching Venture Capitalists

First, check your business out 

Venture capitalists look for promising startups that have the potential to grow and expand in the market. If you are raising fund for a temporary kind of business or a very limited-growth project then Venture Capitals might not be your best option. Reaching out to angel investors in this case is much easier and more probably to get you the results you are looking for.

Then, find the right Venture Capital firm

Now that you have taken a look at your business, you need to find your match.

Often, different venture capital firms are specialized in different stages, industries, countries, so you have to do your research about the kind of venture capitalist you are approaching and what their targeted segment is.

You should make sure your startup and fundraising details (stage, industry, the amount of money you need to raise) comply with the VC and their preferences and criteria.

This will already save you time and effort because unlike angel investors, who might consider going out of their comfort zones when they think the opportunity is worth it, a VC is probably fixed on their plans and will not consider investing in your startup unless the opportunity aligns with their conditions first.

You can do so simply by taking a good look around the venture capital firm website. You can top it off by contacting some of their alumni startups.

VCs are looking for innovative startups that fit within their investment philosophy and process. A VC is also building its portfolio and its brand through the businesses it is supporting. 

Pitch to impress

If you have applied to multiple venture capitals that you think might be a fit, then by now, you might have heard back from one or two, so now you will need to work on your pitching process.

These are some things that a venture capital firm will keep an eye on:

Powerful Personal and entrepreneurial skills

Interestingly enough, before reviewing the startup and the business, the reviewing team might start by checking you first, and it can get personal!

As the founder and the entrepreneur, it is very important to show the investing party that you have enough skills in planning, executing, and decision-making and that you are capable.

Work on your presentation skills, communication skills, and other leadership skills, and make sure you are presenting yourself good enough looks-wise too.

Having the vision and the ability to adapt are some of the most important entrepreneurial qualities that you should prove to the VC you are applying to. You can do this by mentioning how you adapted to COVID-19 situation successfully, how you could find innovative solutions when you ran out of money last year, or how you could find ways to reach customers in a foreign market. This can also be done, if not through spoken words, through the documents you are using to present your business.

Although you as the CEO of the startup are probably at the spotlight, the VC team is going to be also interested in checking what kind of team your business is backed with.

This is what venture capitalist looks in your team:

Commitment: the venture capitalist will be ten times more willing to invest in your company when they can see that your business is supported by a committed serious team.

Passion: the team has to show excitement and passion about their work and company. Having a group of people who are there only to do what they “have to do” without any sense of enthusiasm or interest in it only means that you will either need to spend more time looking for new team members and start all over again in building your startup team or that your business will fall apart sometime soon.  

Knowledge: venture capitalists like to see a team of professionals or at least knowledgeable people in their respective fields with a rich background and somehow excellent skills.

Teamwork: your team must prove that they can work effectively and share their knowledge and opinions with each other in harmonious ways that ensure more efficiency and quality work. Assigning specific roles and responsibilities for each team member is essential but so is having a clear goal that everyone has in mind and is willing to work toward.

Give team building enough time and thinking from the word go in order to higher your startup chance of getting funded by VCs and/or by angel investors.

A powerful business demonstration

Presenting your business properly is a central part to work on before approaching any potential funding source, especially in the times of online communication, where it only takes a few minutes for an investor/reviewer to say yes or no to an investment opportunity.

Every venture capital firm wants to see a well-adapted plan that reflects insights, potentials and the ability to adapt to changes. The plan should also demonstrate a powerful well-thought-out method of achieving the goals and not only a theoretical display of them.

Do not lose your opportunity in getting accepted by a VC by applying when you are not 100% ready to present your business in the best way possible.

Your plan/pitch deck should include clear goals and objectives with a clear timeline so that the reviewing team in the venture capital firm can see that you have done enough hard work and that you are qualified enough.  

Your documents have also to be supported by proof and statistics.

 Make sure you are investing enough time and money in creating your business documents by assigning this task to highly professional team members or by outsourcing it.

Reasonable and fairly high ROI

Before investing in and venturing into a high-risk small business, a VC will need to make sure that their Return on Investment is going to be worth it.

A startup might need five years in order to kick off and start generating enough sales and revenues. You need to make it clear and evident for the VC you are applying to that there is a good potential for your business through demonstrating your numbers in sales, revenues, traction, conversion and other revenues-related KPIs.

A low burn cash rate is also one of the positive indicators when it comes to getting accepted and funded by a VC.

Uniqueness and competitive advantage        

We do not need another Facebook, we need a better Facebook!

This is why a unique idea and an innovative solution is a big positive indicator for VCs and all kinds of investing agencies (loans, grants, banks,) and individuals.

The market is already filled with great solutions for different problems and great solutions to make life easier, but there is always room for innovation and for building even better tools and products, and problems will never end 🙂

Your market-product fit should be demonstrable and your SOM “Serviceable and Obtainable Market” should be big enough.

Show the VC that your product is in demand, demonstrate the need for it and how it was and is received by customers so far, and display the uniqueness of your value proposition. 

Final words

 In conclusion, before approaching a VC and wasting the chance, try to polish your personal skills, your team’s skills, and your business strategy and plans. Be prepared very well to any questions that the Venture capitalist might ask and welcome their feedback. Ask yourself “would I invest in this if I were an investor?” Seeking actual angel investors for feedback would also be beneficial. 

Do not forget to send a follow-up email and keep the venture capital firm updated with all the changes and the progress you achieved in your business.  This might take time, but your efforts will pay off, and getting funded by a VC will definitely help you in taking your business to the next level.

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