If you’re looking to raise money for your startup then no doubt you have given thought to securing investment from a venture capital (VC) fund. But what are VC funds actually look for?
Consider the following items to see if your business might be a good fit for VC investment:
1. You can demonstrate strong proof-of-concept
If you are raising money so you can quit your job, pay the bills and put food on the table then you are off to a bad start. You are deluding yourself into thinking you’ll raise money in this situation. Why?
Professional investors aren’t interested in having a punt. They are interested in adding rocket fuel to a rocket that has already taken off. They don’t want to help you launch your rocket. That’s your job.
2. You have a publicly listed competitor
Are there listed companies doing roughly what you do? If so, you are a good chance of raising venture capital. Very few companies create a new kind of business. Most startups disrupt an existing business.
Think realestate.com.au and the disruption to classified advertising for real estate. Carsales.com.au is another good example in a different vertical.
A VC’s job is to invest in companies that can return a significant multiple on their initial investment. Very few startups achieve this outcome but it needs to be a possibility, and that means you need to be disrupting a pretty big market in the first place.
3. You’re not building a feature of another product
Many startups think if they create one great feature for a big product, then naturally they would be a good acquisition target for a bigger fish. In reality, a big company will just build that feature themselves with no outside help.
Relying on acquisition as your only exit strategy is fraught with danger and kind of like high-stakes gambling.
4. Your traction is fast and rapid
VCs have to justify their appetite for high-risk, early-stage ventures. And to do that they need to invest in startups experiencing exponential growth, not steady-as-she goes linear growth.
Steady linear growth is a noble way to build a bootstrapped business, especially if you are doing it on the side. But if you want to get funding for your company, you need explosive growth.
Many startups think they need funding to get exponential growth. This is a myth. Funding almost never changes the growth trajectory of a company from linear to exponential. If you’re not experiencing exponential growth, your startup is probably not solving a problem that really needs to be solved.
5. You have a team of co-founders
Although many funded startups have one founder, the great majority have two or three. Why is it important to investors? For many reasons: What if you get hit by a bus? The investor wants to mitigate his or her risk.
Also, do other people believe in you? Having co-founders serves as a strong form of social proof. Nobody can do everything on their own and brilliant developers are usually terrible at sales.
6. You’re generating cash
There is a misconception among tech startups that if you are making too much money then you will get valued in terms of an earnings multiple. In some rare cases, this is true. Twitter and Facebook are two very rare exceptions.
Revenue and cash flow are the lifeblood of a company though. You can raise money without it, but typically it is a major factor in determining whether you will secure investment. Your ability to generate revenue demonstrates that you have some commercial acumen, not just an idea.
7. You’re solving a problem that people know they have
The most important part of understanding your customers is understanding their hopes, fears and desires. Often, a founder thinks their idea is the “bee’s knees” without any further evaluation.
If your startup idea doesn’t solve a real problem though, no matter how clever it is, it will almost surely fade into the abyss. Facebook solved the problem of knowing what your friends are up to. The more primal the need you are solving, the more investable your startup.
So will you get the attention of a VC fund?
Just because you want, or think you need, investment from a VC fund doesn’t mean you will get it. Not every company is investable and if you are unable to articulate your story and substantiate your story with solid metrics then you may find it difficult to secure investment from a venture capital fund.