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    Posted by Shane McQuillan 22 Jul
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    What Do Venture Capitalists Look for in a Startup?

    While there are entrepreneurs and innovators that wish there was some kind of divination that worked for finding out what an investor is looking for and what do venture capitalists look for in a startup, we have to console ourselves with the time-honoured tradition of hard graft and research.

    For most businesses, this isn't too big of an issue, but if you're focused on a very niche market that VCs simply prove hesitant towards, or you're just wholly unfamiliar with how to get the attention of these investors, this is the article for you.

    Venture capitalists are an interesting, diverse group to really look into, but we sincerely hope that we can provide you with some insight into what venture capitalists look for in a winning startup and potential investment opportunity.

    For Starters - Show Them You're a Strong bet in a big Market With Plenty of Appetite

    If you're fishing in a sparsely populated river, you're not going to be walking back at the end of the day with nets full of fish. The same kind of logic applies for showing off a business plan for a very specific area with little demonstrable return on investment (ROI) for Venture Capitalists to get excited about.

    So how do we address this? Appeal to VC funds that are firstly interested in the field that you are, and the second being to position yourself and have the research to hand that shows there's not only a febrile consumer-base but one with a voracious appetite for a company providing the services that you do.

    Secondly - Fit in by Standing out

    If you decide to go into a VC's office with a business or product idea that visibly just comes off as one of an extensive line of interchangeable companies. You're going to have a mammoth task ahead of you in trying to convince these same people that you stand out from among the crowd.

    But how do you actually stand out? There are a few ways to do just that:

    • Offer a wholly different product, a unique product with a unique selling proposition. (USP)
    • Solve an outstanding problem. Problems which are holding an industry back hold great promise to those who can solve them first. In the blockchain sector, scaling is issue many are trying to solve.
    • Approach VC’s where your projects fit with their investment strategy. The fact that you have taken the time to research their investment philosophy and previous investments will earn you a badge of honour
    • Provide a more efficient way of doing things within your field.
    • Find a way to offer a better or more efficient service for a lower cost.
    • Research, Research and Research. Have you examined your area of endeavour in a thorough manner? Have you committed to or completed surveys with adequate responses. Have you create a product and run alpha and beta testing? If the answer is yes, then this will place you in front of those who have not.
    • Documentation. Is your documentation ready? Do you have a secure data room set up to provide all relevant financial data on your project? Do you have the required licensing for approaching investors? Is your product papers ready? Do you have legal opinions?
    • Valuation – this is a funny one. There are many valuation models out there which will provide you with the required formula for calculating but not all valuation models are equal and as a startup approaching a VC, you should be able to provide them with a valuation that is realistic and not based on a dotcom model which will severely over inflate the valuation of the company. Be ready to substantiate your valuation with documentation, proof of work, current traction and market projections.
    • IP , intellectual property is always a great thing. Holding patents or maintain a patent pending will increase your likelihood of a favorable result.
    • Fund usage: If the VC invests, How and what will you use their money for? How will their partnership push the project forward and bring about a greater traction and sales which will in turn increase the baseline value of the company which is what every VC wants.
    • An exit strategy….yes, you should have one in place.

    In this sense, you're fitting into your industry by standing out in a specific and unique way. Which is more than enough to gain you some serious credibility in the eyes of VCs.

    Third - Have Your [Management] Ducks in a row

    VCs are not just interested in the kind of company or product you have. What's important to them too is that there's a robust team standing right behind it. So now that they've seen the kind of innovative business or product you have, VCs will want to know about the structure of your team.

    For this reason, you need to show that you not only have a highly structured and hierarchical team in place.

    Additionally, you need to be able to showcase some of the highly professional members of the team that demonstrates that you not only have the winning product but that you have the best team to work with.

    This sometimes does depend on the VC that you're in a meeting with. Some companies get behind a project because of the CEO that's at the helm, while others look, not just at the top level, they look at the foundation team members too.

    Have any experiences with VC firms that you'd like to share with aspiring startups and entrepreneurs? Let us know in the comments!



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