What Venture Capitalists Look for in an Investment Opportunity

If you want to attract venture capitalists to fund your startup business, you should learn what they look for in an investment opportunity. While essential, a “good idea” is not enough. Several additional factors weigh into venture capital decisions, including management, the size of the market, innovative products and risk assessment.

Since venture capitalists invest at high risk, VCs tend to be very selective about placing their money. But, regardless of high risk, VCs give out thousands and millions of dollars to small, untested ventures with the hope that they may eventually evolve into something big. So, what things prompt VCs to drag out their chequebooks?

With so many funding possibilities and start-up pitches, VCs normally have a standard and norms of what they look for and evaluate before making an investment. That said, here are some of the key considerations for venture capitalists when they look for an investment opportunity.

Strong Management and Leadership

One of the first people the venture capitalists meet is the company founder. Therefore, it is no surprise that they look for their role in the management. VCs invest in a management team and its ability to execute the business plan. That is why having strong leadership is crucial to a successful business. VCs want to know if the founder would be able to problem-solve and make adjustments if the business hits roadblocks.

Companies that look for venture capital investments should have a strong team of experienced and qualified people who will play a key role in the company’s development. If your business lacks a talented manager role, you should be willing to outsource someone from the outside. Prepare your team for challenges, and train them to overcome them. Venture capitalists want to see a team that is “all in” from the beginning. If the team is passionate about their product or service, they can get through the “bootstraps” stage of growth. That shows they have the determination to overcome any hurdles team will face in the growth process.

Innovative product or service

Venture capitalists look for a real solution to a problem that has not yet been developed by other competitors. They want to see how your product or service can change current habits and give them the reason for it. What really matters is why would people want to change their habits, or use your products instead of the product they already use. They look for products and services that customers can’t do without because it’s so much better than anything else in the market.

Venture capitalists also look for products or services with fewer competitors. They want their portfolio companies to be able to generate sales and profits before competitors enter the market and reduce profitability. Basically, they want to know how your product is unique and how you differentiate. You are only going to attract their interest if your idea is something that the VC hasn’t been pitched several times already.

Market Size

VCs look for a business that can target a larger market at once. That means a market that can generate 1 billion EUR or more in revenue. As a startup, you need to show that you are targeting as large a market as possible. To receive returns on investments, VCs want to make sure their portfolio companies have a chance and are likely to generate hundreds of millions of euros.

VCs expect that your business plan contains a detailed analysis of the potential market size. Market size should be presented from the “top-down” and from the “bottom-up.” That means providing third-party estimates found in market research reports, but also feedback from potential customers, showing their willingness to buy and pay for the business’s product.

Risk Assessment

As we mentioned in this article, venture capitalists’ job is to take risks. For that reason, they want to gather information, business plan to learn about startup potential. Some of the common assessments include the following:

Could regulatory or legal issues pop up?
Is this the right product for today or 10 years from today?
How much money is there in the fund to fully meet the opportunity?
Is there an eventual exit from the investment and a chance to see a return?

These are some of the ways VCs measure the risk. Venture capitalists want to see that you can make fast and easy conversions. They want to know what the different consumer segments are and how you can target them. They also want to see that there aren’t too many obstacles in the buying cycle and that there is a fairly uncomplicated process for converting consumers.

To sum up, if you are looking for a venture capital investment, make sure your business is at the right stage and prepared for all the challenges to come. Venture Capitalists want to know if your management team is up to the task, what is your market size and if your product has what it takes. Are you in the process of raising capital or in strategizing for a transaction or exit in the future? Our team of experts in Private Equity and Venture Capital Fund Solutions can help with providing the essential financial tools needed to present to investors, help with fundraising, deal origination, deal structuring, valuation, exit planning and execution.