We have talked about how to get a loan from a bank in an earlier blog and now in this article we are going to be more specific and discuss what a Venture Capitalist (VC) is looking for in a business before committing to invest.
The difference between a lender and a VC is that the VC is looking for equity in the business in return for monies that he or she will invest in your new start-up.
VCs usually are looking at receiving a higher rate of return because of the high failure rate for most early stage businesses. Typically, VCs are looking at companies that have already started, so have gained traction in business and are now looking to grow. For example, if you have an idea for a new “app”, you’ll need to have developed a prototype and tested it successfully before chasing VCs. You need some “history”.
VCs avoid start-up businesses and instead invest in the growth stage of a business. They also want to “cash out” quickly and before competition starts to erode the company’s competitive advantage.
When looking for a VC, you want access to their knowledge and network as much as their money. You are looking for a person to accelerate your growth and add something positive to your business.
So let’s get back to the question.
Here are the criteria that a VC will examine to determine if they are going to invest in you.
- Knowledge. They are interested in the talent on your team. If you have a good team, then other good people will be interested in working with you.
- Outstanding Management and Founders. They believe in founder led companies. They are looking for smart founders. If the founders are unable to scale their businesses on their own, they have the smarts to bring in a COO or a CEO to help them with the growth. The commitment to an outstanding management team proves to the VC that you will have the ability to execute on the business idea going forward.
- Strategic Focus. You have identified a “hole” in the marketplace and have plans to “fill” it.
- Execution. A VC is looking for action. If a VC has committed to your project; then he or she will want to see the business forging ahead. A VC has no interest in a ponderous approach to development – they want to see immediate and sustained action!
- Their Return on Investment (ROI). Obviously, a VC will have a major impact on the success of your business and will command a healthy share of the business in return.