7 Things VC Look For in a Startup

Raising money from a Venture Capitalist (VC) is extremely challenging. The odds of receiving an equity funding is about 0.5%.

So what do venture capitalists look for in a business? A “good idea or market offering” is not enough. A number of additional factors weigh into venture capital decisions, including the following:

The bottom line is: VCs invest in people, not just businesses.
The leader & team around the leader often signal to VCs that the Founder has the potential to succeed. If a Founder feels they are lacking in this regard, adding a strong team member can be beneficial.
Venture capitalists want to see a team that is “all in” from the beginning (not waiting in the wings for funding to arrive before they jump on board). VCs want to see that the team shares the leader’s vision and offers the relevant skills and experience to face future challenges the business will face as it expands. Smart leaders are very strategic as they build their core team, making it a source of value that VCs find attractive.

Venture capitalists don’t want to see a “me too” or “also-ran;” they want to see a startup that either provides a compelling reason for people to change from their current habits, or see something that is truly unique. For this reason, venture capitalists want to see a product that has strong differentiators.
Should prospect had to choose between your product and competitor, they’ll want to see that people don’t have a reason to buy someone else’s product or service instead.
If people are already using a similar product or service, why will they want to shift to your product instead?

Venture capitalists invest in good people and good ideas. The reality is that they invest in good markets—that is, markets that are more competitively forgiving than the market as a whole.
If your product or service is for a very niche market, then chances are a VC fund won’t be very interested. They want to see a large market and see that people are spending (big) bucks in that market simply put (Serviceable Obtainable Market).
Even though venture capitalists are typically investing in startups or young companies, they still want to see proof that the business is a viable one. This means moving beyond just having a product idea to having proof that someone will pay for it.
They want to see traction with your core market. This should be a broad segment and intentional, otherwise the VCs will be skeptical.

The basic deal structure, the logic of the deal is always the same: to give investors in the venture capital fund both ample downside protection and a favourable position for additional investment if the company proves to be a winner.
Rights such as participation rights, and redemption rights. VCs also tended to be less flexible in pro-rata rights, and protection in the form of liquidation preference, anti-dilution protection, valuation, board control, and vesting.

Since venture capitalists are investing in startups that are higher risk, they’re usually looking for 10X potential exit returns. This is because half of their investments are likely to be worth zero in five years, and others may return no more than their original investment.
In order to provide a reasonable ROI to their LPs across their portfolio of investments, they need to look for businesses that will make up for the investments that don’t return as well (or at all).
When you’re proving this 10x, make sure it’s realistic. Know exactly how you’re going to make those numbers happen (and that they’re comparable with industry standards and similar organizations).

VCs are looking for companies that fit their investment philosophy and complement their portfolio and brand. This isn’t because they are overly-selective; it’s actually a benefit to the startup they are backing.
By choosing investments that fit their investment philosophy, they are able to concentrate their mentorship in markets in which they have the most experience.
This means they’re looking for a business to which they can best add strategic value.

Venture capital fund is going to take a look at your cash burn. That is how much do you currently have and how quickly will it run out? They call this your “runway”.
Your gross burn rate is the amount of operating costs incurred as expenses every month. If your company is currently earning revenues, then your burn rate will be your revenues minus operating costs and COGS.
If you take your money in the bank and divide it by your monthly burn rate, then you’ll get a good idea of your “runway,” or how long you have until you’ve burned through your current cash.

Venture Capital Funding  The odds of receiving an equity funding is about 0.5%, and the chances of your startup being successful after that are only 10%.
The failure rate of startups is high with on average around 90%.

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