VC Investment Criteria: Top 5 Things VCs Check Before Investing
It’s a nice dopamine hit to see headlines about start-ups receiving VC funding. It reminds us that these companies defied the odds. They did the hard yards in building their idea/product as well as preparation and presentation for meeting with investors. As a result, according to Fundera, they are one of the 5 in 10,000 start-ups that manage to pass VC investment criteria and receive funding.
Ready to follow in their footsteps? Make sure you’re ticking the boxes for these 5 basic yet fundamental things VCs look for before investing.
Top 5 Things VCs Check Before Investing
1. Strong Financial Plan
First on our VC investment criteria list is the financial plan. Venture capitalists are business people. They want to see efficient use of capital and strong ROI potential. How will you use their money? They want you to present it clearly to them in a way that showcases good financial acumen. Based on your product and business model, VCs will want to see the forecast for marketing, talent recruitment, and overall operational expenses.
Another important aspect is your Cap Table or list of who has ownership in your company. This will give them a glimpse of who they will be doing business with if they invest. These financial aspects will communicate an element of whether they will get an ROI on their investment.
2. Proof of Traction
VCs will want to see solid proof that your product is actually needed or wanted by your target market. Not only that, they want to see if your market is big enough to provide healthy capture and returns.
Knowing how much your market size should be to get investors is tricky. There is no one-size-fits-all. All investors are different. Some would invest in a minimum market size of $100M. Others would require $1B.
3. Unique & Innovative Product
Is its uniqueness useful enough that customers will choose your product over competitors? This is one of the most important VC investment criteria. They would want to see a product model strong enough to change a market’s habits. A unique product gathers attention. It’s also a plus if your product model is difficult to duplicate.
Another big VC investment criterion is how you will sell the product. Not just focusing on the features and benefits of the product itself. Are your sales and overall business strategies unique? Showing VCs a different approach will show that you are not just focusing on differentiating one area of your business, but multiple areas to compete in the market.
4. Strong Team
Another key VC investment criterion on our list is the team dynamics. Does your start-up have a solid team with a reliable and inspiring leader at the helm? Demonstrating your ability to attract and retain a high-quality team is a great way to build confidence in VCs. This assures them that they can trust the management to handle their money. Be sure to also give them a glimpse of your company culture and how your team will navigate choppy waters when they (inevitably) arise.
VCs would expect your present team to already have successful business backgrounds or executive roles in the past relevant to your venture, especially the leader.
5. Metrics & Evidence
These are absolutely critical to raising investment. These VC investment criteria are the proof of your business claims and goals. Your credibility is heavily reliant on this. Make sure your numbers are true when it comes to customer acquisition, churn rate, and revenue.
Most of the time, getting a fixed answer to your cash burn rate, exit potential, and market size can be difficult. But prepare an estimate based on the most recent data in your market.
Besides these big numbers, it’s also best to include quality proofs. For example, reviews or testimonials from customers. What do they like best about your product or service? Showcase it.
Concluding the VC Investment Criteria
Keep in mind these fundamental VC investment criteria when meeting with future VCs. At first, it will take time before you close deals. As mentioned earlier, only 0.05% of start-ups manage to get VC funding. But rejections are part of doing business. So believe in your business and use those no’s to build better strategies that will eventually close deals.
Will some of your VC investment be used to hire fresh talent? Salient is a recruitment firm which specialises in hiring sales and technology talent for start-up’s. We’re experts in finding the right talent for the specific stage of growth that a company is at.
Trust us – it’s easier said than done.
