This article will answer the question How Venture Capitalists Make Investment Choices. When deciding whether or not to invest in a startup, VCs consider a wide range of factors. However, some things are more important than others. As someone who has pitched many different startups and worked with hundreds more, I have seen what matters most when it comes to attracting funding from venture capitalists (VCs). If you're hoping to secure investment from a VC, these five things will help make your pitch that much stronger:
The strength of the founding team
The strength of the founding team is the most important thing. The VCs at the top firms know this, so they invest in a company with a strong team over one with an idea that might be good but doesn't have a great founding team.
They want to see experience in all four areas: industry experience, working together as a team, working with product and working with space.
VCs also want to make sure there's passion for what you're doing and that you've got something no one else has done before.
The core problem they are trying to solve
As an entrepreneur, there are few things more critical than understanding the problem you’re solving. This is not just something that helps you communicate with your team or customers—it’s also a key factor in whether a VC will invest in your company.
- Understand the core problem well enough to explain it in simple terms
- Be able to explain it so someone who has never heard of your product can understand it
- Be able to explain why this particular problem exists and why there’s still no good solution for it
As a fundraising consultant, we offer various services - all with the goal of increasing your chances of making investments.
The market they're trying to address
It's all about the market. You need to have a large market that is growing, not saturated or too competitive, and has low barriers to entry.
I'm sure you've heard the phrase "follow the money" before. The same is true for VCs—they want to invest in companies that they think will make them even more money than they invested.
How strong their product is
This is pretty much a given, right? You’re going to take a look at the product and make sure that it’s ready to be used by customers. It should be easy to use, scalable (meaning you can easily add more servers or users), affordable (the pricing model must make sense), and deliverable in a timely manner (e.g., apps on mobile devices). The last point goes without saying: if the company cannot deliver software updates on time and accurately with little- to-no bugs, then that could be game over for them as far as getting funded goes.
How much funding they have left
You should be able to answer these questions:
- How much funding they have left. This is a simple question, but it's not always easy to find the answer. If you do some digging, you should be able to find out how much cash a company has on hand (and how much they're burning through), how much debt they've taken on (if any), and whether or not they're close to running out of money. The last thing you want is for your investor to go bankrupt before paying back your investment! Keep in mind that many companies don't disclose this information unless they're forced by regulation.
- How much funding they have already raised. One number that every startup should know is what percentage of its total funding has already been raised through private equity deals (rather than venture capital). Why? Because once a company hits 85% of its fundraising target—regardless of whether or not it's gone public yet—it stops being considered “early stage” and starts being considered “mid-stage” instead
It is important that you make sure you have a good team and a solid idea before pitching to a VC
As an entrepreneur, you should know that it is important for you to have a good team and a solid idea before pitching your business plan to entrepreneurs. This will help them decide whether or not they want to invest in your company.
It's also important that you have traction and funding. If you don't have traction and funding, then there's no point in pitching your ideas at all because no one will ever pick up on them! After all, who would want something that hasn't even been tried out yet?
You need to have a good product first before pitching it so that the investors can see what kind of success rate the product has had so far; otherwise they won't trust any claims made by anyone associated with said product (i.e., yourself). It's also imperative that these claims are backed up by evidence such as customer testimonials/reviews (if applicable) - this way people know why they should buy into what they're saying!
Lastly but certainly not leastly: A lot goes into determining whether or not someone should invest their hard-earned money into something new."
Conclusion: How Venture Capitalists Make Investment Choices
I hope that this blog post has helped you understand the key things that VCs look for in potential investments. Remember, if you’re thinking about pitching to a VC, make sure your pitch deck is absolutely unparalleled. You can check out our Pitch Deck Design Service.