Venture capital or VC funding has become quite popular over the last decade or so. After all, VCs not only provide the necessary funding for young and innovative businesses, but also offer partnerships with seasoned professionals and experts who have proven ability to develop and grow a business. Earlier, Anand Jayapalan had mentioned that as venture capital investments tend to be high-risk, VCs can be fairly selective about where they place their money. As a large number of startups seek VC investment today, competition in the industry can be fierce. Here are a few elements that venture capitalists look for in a business:
- Leadership ability: One of the very first people that the venture capitalists shall come in contact with would be the Founder/CEO of the startup. They typically try to see if the founder is inspiring and a great communicator, if are they fully committed to the business idea and vision, are they willing to listen and take advice, and so on. Investors look for startup founders with good problem-solving ability, who can make adjustments should the business hit roadblocks.
- A strong team: The team of a startup is also an important factor venture capitalists look for in an investment. After all, VCs invest in people, not just businesses. Venture capitalists generally look for a team that is “all in” from the start. They tend to believe that if the team is passionate about their product or service and can get through the “bootstraps” stage of growth, then there is a good chance that they would have the determination needed to overcome any hurdles they come across in the growth process. Venture capitalists may also want to see the team share the vision of the founder, and be equipped with the skills and experience needed to face future challenges.
- A Clean cap table: As venture capitalists look at a startup, they generally prefer to see a limited number of investors. They especially like to see accredited investors. A VC would essentially want to see the capitalization table of the company, which would feature a list of shareholders, how much of the company they own, as well as the amount they have invested. Multiple rounds of investment and the cooperation of existing investors are usually needed by early-stage businesses. Carrying a large number of small investors can be very difficult for a business, and make it hard for smaller investors to keep up with larger ones in later rounds. The majority of entrepreneurs try to walk a fine line to secure capital early on without adding baggage to their cap table.
- Innovative product: Venture capitalists would want to see a business that either offers a compelling reason for people to change from their current habits or provides something that is actually unique. They look for products with strong differentiators. After all, if consumers are already using a similar product, why would they want to shift to the offerings of the startup.
Earlier, Anand Jayapalan had spoken about how even though venture capitalists do ideally invest in young companies and startups, they still want to make sure that the business is a viable one. They want to see traction with the core market of the company, and hence carefully go through the proof of concept or “traction” of the startup.
