What Venture Capitalists LookFor In The Next Big Startup

Venture capitalists are what makes the startup world go round. They invest in new companiesand technologies with the highest potential. If you want to get funding for your business, it'simportant to know what venture capitalists look for when making investments. We will explorewhat they consider when evaluating startups, what kind of projects they like, and what elsethey are looking for in an investment opportunity.

How does Venture Capital work?First things first, how does venture capital work? The short answer is that a VC firm will investin your startup, giving them what is called shares. These shares provide the VC with companyownership of what you have built and what profits it generates.

That means they'll get to vote on business decisions like what projects should be pursued oracquisitions made (paying someone else for their company). They also take an active role inhow much risk venture capitalists want to assume when investing money into new startups.

Who are Venture Capitalists?Venture capitalists are investors that provide funding to startup businesses and techcompanies who have high growth potential. This could be funding startup ventures orsupporting small companies that wish to expand but don't have access to equities markets.The main objective of VCs is to maximize their return on investment while supporting innovativeprojects.

15 Things Venture Capital Investors Look For In InvestmentOpportunitiesWhat do venture capitalists look for in the next big startup? Investors are looking for adisruptive idea that fills an unmet need. They are looking to make money and want theirinvestment to be worthwhile. The following is a list of 15 things investors look for ininvestments.

1. Leadership skills, passion, and commitment

A VC will meet founders and will look at how these persons present themselves.

● Are they inspiring and great communicators?● Do they seem fully committed to the company?● Are they willing to listen and take advice from others?● Do they seem calm and competent under pressure?● Is the founder passionate about their product or service?

This tells the VCs if a person is likely to be successful as a business owner. If you are a startupfounder and have doubts about your abilities, then it can be helpful to have someone withexperience - such as a CEO. When investors see that you're passionate and determined, theymay invest in your company.

2. Robust management team and top-notch human talent

Successful startups are composed of a team that is aligned with the founding vision from dayone. VCs invest in a company's management team because they want to know that a team canexecute a business plan. They're not looking for inexperienced managers but for those whohave a track record of building successful businesses.

Companies that need to get investment should be able to provide a list of people who will playessential roles in the team. If you don't have any qualified people, hire them from outside.There is an old saying that is true for many VCs – they would instead invest in a "bad idea" ledby experienced managers than a good business plan supported by inexperienced managers.

The VCs will spend time in your office. They will ask questions and may have whiteboardsessions. If the team has a dysfunctional approach, investors will not choose them. The teamshould work well together. Many investors want to know the people behind the startup. Theywant to know that those people have skills, experience and can grow a business.

Preparing for common questions like the following ones is crucial:

● What makes the team so unique?● What type of domain experience does the team have?● What new members will the team need in the near future?● Why does the team have the expertise to execute the business plan?

See also: 7 Reasons Why Teamwork Is Critical For Your Startup's Success

3. A clean capitalization table

A clean capitalization table will show that your company is better off without any outside debt,and you have a solid equity base to build a business. This means positive cash flow is morelikely, and you're less probable to be affected by external factors like interest rates or economicdownturns.

The appearance of a company will not fool savvy investors. They know that great startups arebacked up with capital and have less risk when they invest in it, so they pay attention to who isbacking them.

A good way for investors to understand who’s behind any dealings is to look at theircapitalization table (the list of shareholders, how much equity each person has invested), andwhat kind of people are investing: accredited or non-accredited?

One of the most difficult challenges early-stage businesses face is securing a big enoughinvestment round. One way to get around this issue without taking on too many smallerinvestments in later rounds, which can be risky for both parties and create conflict betweenthem, is by maintaining a clean cap table with only larger investors rather than small ones.

Discover what founders should do when the cap table gets messy here.

4. Innovative product or service with a competitive advantage

Venture capitalists want to see a business that is different from what people are already using.If someone is using a similar product or service, why would they switch to yours? Investorswant to put their money into great projects. They want a solution to a problem that no one elsehas solved yet.

VCs want their companies to be the first ones in the market. They want them to be able tomake money before any other company comes in. This will happen when there are fewercompetitors. The entrepreneur should answer all of the questions they ask and explain theproduct and why it's different from others.

● What is the benefit for your customers purchasing and using your product?● What are the major milestones?● What are the distinguishing features of your product?● Has there been service or product versions that you have had to fix at an early stage?● What features are you planning to add?● How often are you open to improving your product or service?

5. Proof of concept – What traction has your startup gained?

Even though venture capitalists usually invest in young companies, they still need to beconvinced that this company is a good investment. To prove this, it needs market traction andan intentional core market with broad segments, which will make the VCs more interested.

Another important thing for VCs is to see if a company has any early traction because this willmake the startup more likely to get financing. Here are some traction factors:

● The creation of a beta or MVP (minimum viable product)● Early adopters or pilot customers● Strategic partnerships● Customer reviews● Access to programs such as Y Combinator or accelerators and incubators

Investors want to know how the company can increase its traction. What has made itsuccessful so far? How can it be scaled up? Make sure that you show any early buzz or pressthat your company has received. List how many articles and publications mention thecompany.

If you don't have an MVP, this video by Kalle Hallden will help you figure out how to create aminimum viable product for your startup and everything that goes with it.

https://www.youtube.com/watch?v=T8xvMIiFzD0

6. Market size and opportunities

The bigger the size of the market, the greater chance there is for a trade sale. This means it willbe exciting for people who want to exit their investments. The business should grow fastenough to take first or second place in the market. So venture capitalists are more likelyinterested in investing in your product if you have a fantastic idea and proof that manyconsumers would actually buy/use them.

For investors, it's important to know what your company plans on accomplishing in the future.If you want to be big and make a huge impact, highlight this idea right off the bat! However, ifyou are small now but have ambitions for growth over time, let them know that too to includeboth scenarios when considering investing with you.

The Hotjar Startup Guide explains all you need to know about the product-market fit.

7. Conversion proof with uncomplicated processes

Venture capitalists want to know that you can get people to convert. They want to know whatthe different customer segments are and how you can reach them. They also want to see thatthere aren't too many barriers in the buying process and a relatively uncomplicated process forconverting clients.

8. Sustainable cash burn rate

The VCs are always looking for the next big thing, and it doesn't get much more exciting than astartup with creative prospects. They will ask you about your cash burn to see how well-fundedthe company is and whether or not they should invest in this venture capital fund potential.

In order to determine if a company has enough runway, that would be necessary beforerunning out of money. We calculate gross burn rate by dividing monthly costs from operatingexpenses (including COGS) by monthly revenue streams minus operational expenses, thendivide that number into months until using up all funds available - which gives us the "runway."

9. A detailed plan that shows how you will use the capital

It's time to put your hard work into words. When a venture capitalist is looking at investing inyou, they want the bottom line of what it will do for their business and how much return oninvestment (ROI) there may be if this opportunity pans out.

A financial forecast can help by showing them exactly where and when money would go andforecasting future revenue streams using trends from past data sets or educated predictionsbased on current events.

It's easy to get lost in the weeds when it comes to starting a company. Investors wantcomplete transparency so they can see your burn rate and make sure you have enough cashon hand for the next milestone or raise more financing if needed.

10. Entrepreneurs recommended by trusted colleagues

Venture firms get many unsolicited executive summaries and pitch decks. Most of the time,those requests are ignored no matter how interesting their product might be. The way tocapture the attention of a venture capitalist is to get a warm introduction from someone theyalready know: an entrepreneur, lawyer, investment banker, angel investor, or another venturecapitalist.

Read this Forbes article to learn 10 Reasons Why Networking Is Essential For Your Career,even if you're a startup founder or business owner.

11. Professional and compelling pitch deck

To get the attention of investors, you first need a polished pitch deck. Investors will be lookingfor something innovative and engaging with committed entrepreneurs who have bigopportunities ahead of them.

Before pitching your idea, make sure it has been vetted by someone else to give feedback onhow successful or unsuccessful it may be from an investor's perspective.

See also: 30 Legendary Startup Pitch Decks and What You Can Learn From Them.

12. Favorable terms or downside protection

In a study, 885 people gave their opinion on how important each feature was. The featuresincluded things like pro-rata rights, participation rights, and redemption rights. Most of thepeople in the study were less flexible with these. They also tended to be less flexible with otherfeatures, such as anti-dilution protection, valuation, board control, and vesting.

13. The company's intellectual property

Many companies will rely on their intellectual property to be successful. Investors will payattention to what you say and expect you can answer these questions:

● What intellectual property does the company have?○ Patents○ Copyrights○ Trademarks○ Domain names

● What type of assurance do you have that the company’s intellectual property doesn'tviolate the rights of a third party?

● How did the company develop its intellectual property?● Would any prior employers have a potential claim to the company’s intellectual

property?● Does the company rightfully own and control to use of the intellectual property?● What rights are due to the company if you developed the intellectual property at a

university or with government grants?

Check out this blog post, Intellectual Property for Startups: Everything You Need to Know.

14. Realistic and profitable financial projections

When you tell investors your company will make $5 million in five years, they won't beinterested. Investors want to invest in companies that can grow quickly and become successfulbusinesses.

On the other hand, if you predict to be at $500 million by three years with only a 20% growth ofoperating costs and marketing costs during that period - they'll think it's unrealistic. Don'tmake assumptions like expecting revenues to increase by 400%.

Investors won't believe your financial projections unless you tell them what the keyassumptions are. If they think those assumptions are unreasonable, they may push back andask for an explanation as to why that assumption is reasonable.

Find out How to Write the Financial Section of a Business Plan - a guide by Inc. Magazine.

15. Proper legal structure and compliance with applicable laws

Investors don't like investing in a company if the founders have a legal problem or failed tomake legal filings. Investors also don't want to put their money in companies with unaccreditedinvestors. To prevent this, you need to make sure that your company is clean, has made all ofthe proper filings, and complies with employment laws. You can get help from an experiencedstartup lawyer for this.

The Bottom LineFor a startup to be considered for funding, it must have a founder with leadership skills,passion, and commitment. A strong management team should also include an innovativeproduct with a competitive advantage if the company is going after markets with enormousopportunities and has conversion proof without complicated processes.

Sustainable cash burn rates are necessary to show how much money will be needed frominvestors' funds over time so there's enough left for operations and business growth. Having adetailed plan which shows how you'll use capital available while presenting your pitch deckmay impress investors too.

Plus, entrepreneurs who can provide references by other VCs' trusted colleagues shouldincrease their chances of success when applying for financing through angel investingnetworking groups.