What Influences Venture Capitalists' Investment Decisions

By Fernando Berrocal

What do Venture Capital (VC) firms look for in a candidate? Before you approach a VC's business for investment, you need to understand what they look for. While not all VC's are the same, most use similar criteria to determine if your business is a worthwhile investment. The first step is to determine what VC's are looking for and what the best actions for you to take to receive funding.

Venture Capitalist Investment

Inside the VC mindset: Consider a few questions to have a better understanding of what VC's are thinking. First, what is the market opportunity for your business? VC's like to invest in businesses that have a broad appeal rather than those limited to a niche market. The more opportunities, the better. So, what type of issue are you attempting to resolve? You'll have a larger potential market share if your solution solves a problem that businesses or individuals face.

It's even better if the issue has a major influence on their lives or businesses. Customer Relationship Management (CRM) software, for example, may assist a sales-oriented business. VC's are looking for a product that has the potential to become essential for a specific market.

What do VC's want to see? In a potential investment, VC's seek 3 things: a competitive edge, a competent management team, and consumer validation.

The Competitive advantage of your Startup:  Consider your competitive edge to be your special ingredient. It's the ingredient that makes magic happen, and it's what sets you apart. Perhaps your competitors are planning to release identical items, but you're six months ahead of them in development, ready to capture market share before they do. Perhaps you've patented important Intellectual Property (IP). Perhaps your sales and distribution channels are cutting-edge. Investors are drawn to you because of your unique qualities.

The Management Staff of your Startup: VC's aren't just interested in your product; they're also interested in you. It's critical that your team stays cohesive and on track during the ups and downs of development and launch. That is something that VC firms want to ensure. They'll be curious about the dynamics of the management team, their jobs, and how they get along. They'll also want to know about your previous work experience and what you've contributed to prior teams.

Customer Validation for your Startup: You're making a product for users; without them, you won't make money. If you can establish a roadmap for how you've been able to enroll customers (for example beta testers) it may help show the viability of your business, even if your startup is still in its early stages.

Five Things you'll need to get your Business Funded: You must pitch to VC's to obtain VC investment. You'll likely have to repeat the process. Here are five important things to remember in the funding process.

  1. Your Goals and Objectives: Firstly, VC's want to see the numbers, as well as your plans. Gather and prepare your materials:

  • Proof of Concept.
  • Total Available Market (TAM).
  • Metrics of Profitability.
  • Acquisition Strategy for Customers.
  • Scaling Up Plans.
  • Founder Vesting Strategy.

  1. Preliminary Information: Before talking to VC's, you'll need two things: your value and a list of possible firms. You may use a variety of approaches to determine the value of your property. It depends on your plan whether or not a high value is your ultimate goal. Investors would expect you to expand quickly if your worth is higher. You should narrow down who you pitch to from your list of possible VC firms. Select firms that have made investments in businesses that are comparable to yours. You're almost ready to start pitching after putting together your value, a list of possible investors, and critical indicators.

Venture Capitalist Investment Decision

  1. VC Research:  After you've prepared your list of businesses, it's time to do some research on each of them. You'll be able to modify your pitch for each VC better if you have more information about them. Find out the following information about each prospect:

  • How well-versed they are in your industry.
  • If they've supported successful startups.
  • What you and the VC firm have in common.
  • The size of their fund and the average amount of money they invest.

  1. Your Pitch: When you contact VC's, you'll utilize your pitch to educate them about your business and convince them to invest. Pitches tend to follow a regular pattern, and each pitch has a list of must-haves. 

  1. Practice: Try out your pitch on friends and acquaintances to get feedback. Then, once your pitch is live, be sure you debrief with VC's after each meeting to identify any stumbling areas where your proposal should be enhanced. Also, once you've been turned down, consider reaching out to investors. They might be able to provide valuable input that you can utilize to improve future attempts.

How to create an investor network for your business: When it comes to expanding your network, it's better to interact with individuals who can refer you to people in their networks rather than VC's who will invest in your startup. That is to say, approach it naturally and indirectly.

Meet your friends’ VC's: If you have friends who are entrepreneurs, they may be ready to refer you to their own VC's or those in their network. Because it's their connection, how they perceive your business is critical, so take their pulse first. Find out what people think of your business by having an open and honest dialogue with them. Consider it a go-ahead to ask for an introduction if they're thrilled and feel you're on the right track.

Early investors may be able to connect you with VC's: Take advantage of the relationship after you have investors behind your idea. You can maintain their excitement by keeping them informed and selling them on the value of your firm regularly. When it's time to discover the proper VC for your business, ask for referrals.

Get Introduced to People through Entrepreneurs you don't know: A call or meeting with another entrepreneur will be easier to schedule than with a VC business. Another entrepreneur might be your ticket to venture funding. Request to speak with them about their financing experiences, and persuade them to invest in your startup.

Keep track of your pipeline in a document: Maintain a document to monitor both VC's you'd like to meet and the ones you already know as you grow your network. Keep track of people you share common interests with, as well as friends and acquaintances who have already introduced you. Don't rely on one person for all of your introductions; try to spread them out equally. It's preferable to diversify to avoid a contact being burned out as a result of frequent inquiries.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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