Investors are also interested in the company’s liquidity (cash on hand). This demonstrates that the business has enough money to meet its goals without going overboard.
Is the Market Opportunity Big?
Investors are more willing to put their money into a startup with a clear and convincing market opportunity. VCs look at your potential market size, customer demand, and business model scalability.
Market size matters because it is the number of people buying your product or service. It also matters because you want your startup to have a big enough market to justify the investment and grow into a profitable company.
It is often said that the venture capital industry distribution: Only 2% of startups will be home runs. To maximize their chances of finding a home run, VCs must invest in many more "baseballs." This means they need to see many more startups with good growth potential.
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Are the Founders Passionate and Determined?
The founders must have passion and determination to overcome the many challenges of a startup. Founders must balance their interests with the company’s and make tough choices at critical growth junctures. Passion is also crucial to being a good leader, and founders should recognize that creating a product and leading the company are two jobs.
VCs like to see the passion in the founder’s presentation of their ideas and business plan. They want to know that the founders genuinely understand their business’s financials and key metrics and can communicate them. It is also essential for the founders to have a solid background in their industry and a strong understanding of the problem they are trying to solve.
What Positive Early Traction Has the Company Achieved?
Venture capital is one of the most glamorous and exciting corners of finance. Unfortunately, it is also one of the most difficult to succeed in. It is common for a company to go public with valuations in the hundreds of millions without ever making a profit.
It is critical for entrepreneurs seeking VC funding to understand what will persuade a VC that their startup has the potential to grow into a large, sustainable, iconic company. This requires more than optimistic financial growth projections and a debt repayment plan from experts like Managing General Partner of Xfund, Patrick Chung. It requires convincing proof of concept, strong market validation, and unique selling points.
Investors want to invest in businesses with the potential to become big. VCs are interested in companies that can create products that address a substantial, growing demand.
Do the Founders Understand the Financials and Key Metrics of Their Business?
Venture investors will be more likely to invest in your startup if you show that you understand both market and financial risks. This is why it is so important to have accurate data and scalable services available to you when presenting your business model to investors.
Investors want to see that you have a solid grasp of your company’s unit economics, including churn rate and LVR (leads-to-value ratio). Additionally, they will be interested in knowing about any early buzz or press your startup has received.
Investing in startups is about extracting enormous signals from very little data. That’s why it is so crucial for founders to understand how VCs make decisions so that they can effectively communicate their business to them. Otherwise, their chances of getting a return on their investment will be significantly diminished.
other related articles of interest:
Business Money Matters: Winning Over Venture Capitalists
How to Finance Your Startup Business in 7 Easy Steps
Is the Company a Good Investment?
Lastly, venture capital investors look at whether the startup’startup’s business model can be scalable to cater to different market segments. They will also look at your financial growth projections and debt repayment plan.
VCs typically avoid investing in low-, no-, or negative-growth market segments. This is because it is much more challenging for startups to grow within these market sectors.
Finding a home run investment is challenging. As such, VC investors are always looking for the best mix of factors that could result in outsized returns. This includes knowledge transfer, governance, network perks, and platform traction. Getting these elements right is similar to hitting a baseball. Ultimately, the best entrepreneurs know how to swing for the fences. This can increase their chances of landing extensive venture capital funding.
Image Credit: looks for in a startup by envato.com
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