All venture capitalists want to see certain qualities in a startup that signal strong growth potential before they invest. Entrepreneurs who recognize these factors can improve their pitches, differentiate themselves among other contenders, and ultimately improve their likelihood of securing funding. In particular, entrepreneurs should know that venture capitalists prioritize the following characteristics.
A great idea is worthless without effective execution. Consequently, assembling the right team to translate the idea from concept to commodity is critical. Although the composition of the right team will vary from business to business, a venture capitalist will always seek certain must-have qualities.
First, the management team must be talented. An investor needs to feel confident that management is capable of executing on the business plan, thereby increasing the likelihood of securing a return on their investment. Ideally, a venture capitalist wants executives with a track record of growing profitable businesses to comprise at least part of the management team. Experienced professionals give an investor peace of mind that their money will be well-managed. A founder should think critically about the value that each member of management brings and be prepared to explain this rationale to a venture capitalist when the team is vetted.
Second, the team must be willing and able to adapt. A business sometimes needs to change direction to thrive or simply survive. Venture capitalists want to back a team that is flexible to changes in market conditions and that can adapt resources to new ideas. Although demonstrating this quality is difficult, founders should consider how the business could evolve if required.
Finally, the team must show a passion for the product or service being sold. A venture capitalist will want to see that the team is genuinely enthusiastic about and committed to the business. The rationale? A truly engaged workforce is more likely to achieve its objectives and targets.
Venture capitalists look for businesses that can grow quickly and significantly in a large addressable market. Customarily, “large” means around US$1 billion in revenue globally. Generally speaking, only rapid and sizeable growth works for venture capitalists, as they look to exit investments within three to seven years in order to return capital to their own external and internal investors. A founder should think critically about the market for the product or service being sold, and whether that market supports the rapid growth likely required of the business. Venture capitalists will be particularly interested if the market itself is growing.
A founder should be prepared to show a venture capitalist that their product or service can be reproduced and scaled efficiently to generate revenue — a concept known as “commercial viability.” Venture capitalists will want to see how the business will turn an idea into results and, in course, a return on investment. The model should include projections about how the business will deploy the venture capitalist’s investment and how such expenditure will ultimately promote growth.
Despite recent occurrences of companies attracting high valuations with little to no revenue streams, these situations are rare. A founder should plan to show consistent and strong early revenue streams to help demonstrate commercial viability.
Ventures capitalists are attracted to products and services that differ from their competitors, especially unique offerings. So how does a startup stand out from the pack? Companies can achieve competitive differentiation in numerous ways, including through product or service advantages, the marketing/manufacturing/packaging process, or the price. From a venture capitalist’s perspective, the more distinguishing factors, the better. Once a startup has found its competitive edge, a venture capitalist will expect that advantage to continue. Therefore, founders must continually identify potential competitors and assess such companies’ strengths and weaknesses.
Seeking venture capitalist funding is always a challenging experience. However, founders are more likely to attract investors by demonstrating that the startup possesses a talented team, a large addressable market, a viable business model and differentiating competitive characteristics. Furthermore, by focusing on these qualities, founders will help ensure a company’s stability and success for the long term.