First and foremost, venture capital firms want to see an entrepreneur with passion and vision. Unfortunately, this usually isn’t enough to get them opening their pocket books. Some venture capital firms will have narrow criteria for the types of companies that they invest in while other will adopt a more broad portfolio and invest across many sectors.
In any case, nearly every venture capital firm is looking to see if you’ve made signification traction for each of the following critical steps.
Investors may think that you have a great idea and that the market poses a significant opportunity, but if they have confidence in your team’s ability to seize the opportunity you will be dead in your tracks. Your team is perhaps the single biggest factor that investors consider when they are evaluating the attractiveness of the investment. Your management team does not have to be fully built out, but the founders must possess the credibility to launch the company and built a world-class team.
2. Stellar Idea
Every entrepreneur gets attached to their idea. However, the reality is that very few start-ups present an idea that is actually unique. What makes an idea compelling to an investor is 2 fold: 1) does the idea offer a solution to a big problem or opportunity, and 2) is the idea protected via intellectual property or some other barrier to entry.
Technology is similar to the stellar idea. Your technology needs to be broad enough to to solve a problem for a large group of people but focused enough to solve a problem that is not currently being solved. Similarly, good technology needs to be protected. Patents alone are not enough; you need talent to assure investors that you will stay ahead of the game.
4. Market Opportunity
A good market opportunity is more than just a large market size. It is a market that is not over crowded with competition. It is a market with an opportunity that has yet to be exploited. It’s a market that has a lot of potential for you to continually create value down the road. Truly innovative companies discover ways to create big markets.
5. (Sustainable) Competitive Advantage
Most entrepreneurs understand the need to have strategic advantages (both product/service advantages as well as business strategy advantages), but what many fail to understand is that venture capitalists want to know just how sustainable that advantage is. If your competitor can reverse engineer your idea, hire new personnel, implement a new sales/marketing strategy or lower their costs to match your price point then your competitive advantage is not very sustainable. Sustainable competitive advantages are not easily copied and generally stem from one or more of the following: vendor relations, product sourcing advantages, prime location, unique products / services, customer loyalty, customer service reputation, or distribution channel advantages.
6. Credible Financial Projections
Every investor knows that your financial projections are dependent on assumptions and that those assumptions will undoubtedly change. But, financial projections are extremely valuable in explaining the business to the investor – they show what drives your growth, how profitable you can be, and where the company can go over the next 3 to 5 years. They also show your ability to turn a business concept into a realistic, attractive business model.
7. Proof of Concept
Lastly, we have proof of concept, or market validation. Behind the management team, this is one of the other more influencing factors. Venture capitalists want to know, are people buying this? Have businesses signed letters of intent? Is there evidence that your solution will be adopted by the masses? The more credibility and market traction that you have, the more attractive your startup will be to venture capitalists.