By Richard D. Harroch and Larry Kane
Venture capitalists make decisions constantly about whether or not to invest in various startups. The majority of the time, the answer is no. There can be many reasons for this decision, including that the startup is not within the firm’s focus or stage of desired investment. But assuming the company is within the investment parameters of the fund, here are 15 key determining factors for whether a venture firm will or will not decide to invest in a startup that is seeking venture capital.
1. Is There a Great Management Team?
Many investors consider the team behind a startup more important than the idea or the product. The investors will want to know that the team has the right set of skills, drive, experience, and temperament to grow the business. Anticipate these questions:
- Who are the founders and key team members?
- What relevant domain experience does the team have?
- What key additions to the team are needed in the short term?
- Why is the team uniquely capable to execute the company’s business plan?
- How many employees does the company have?
- What motivates the founders?
- How do you plan to scale the team in the next 12 months?
Ultimately, the investor will need to make a judgment about whether the founder and team will be enjoyable to work with. Does the investor believe in the team? Is the CEO experienced and willing to listen? Also, involving experienced advisors can be very helpful in the early stages to help bridge an early stage team that is still growing.
2. Is the Market Opportunity Big?
Most investors are looking for businesses that can scale and become meaningful, so make sure you address the issue right up front as to why your business has the potential to become really big. Don’t present any small ideas. If the first product or service is small, then perhaps you need to position the company as a “platform” business allowing the creation of multiple products or apps. Investors will want to know the actual addressable market and what percentage of the market you plan to capture over time.
For most investors, a “big” market opportunity is in excess of $1 billion in sales annually.
3. What Positive Early Traction Has the Company Achieved?
One of the most important things for investors will be signs of any early traction or customers. A company that has obtained early traction will be more likely to obtain venture financing and with better terms. Examples of early traction can include the following:
- The creation of a beta or minimally viable product
- Initial or pilot customers, especially brand name customers
- Strategic partnerships
- Customer testimonials
- Admission into competitive programs such as Y Combinator or other technology accelerators or incubators
Investors will want to know, How can the early traction be accelerated? What has been the principal reason for the traction? How can the company can scale this early traction?
Don’t forget to show early buzz or press you have received, especially from prominent websites or publications. Feature the headlines in a slide on your investor pitch deck. List the number of articles and publications mentioning the company.
4. Are the Founders Passionate and Determined?
Many venture capitalists look for passionate and determined founders. Are they individuals who will be dedicated to growing the business and facing the inevitable challenges?