Start-up founders and team members often spend enormous amounts of time refining their business plan to ensure goodness of fit for "external investment readiness" but the central question remains, what are VCs looking for in start-ups?
Venture capital firms (VCs) receive dozens of applications from fund seekers but they are only keen to invest in high quality deals. To provide you with a sneak peek of capital raising statistics;
“6 in 1000 business plans get funded on average, 5% of business plans are read beyond the executive summary, 10% of proposals pass initial screening, and
10% of pre-screened proposals pass due diligence & receive funding.”
Source: 1000ventures.com
In order to access VC money, it is crucial that you thoroughly understand the VC selection criteria before you apply for funding. VC selection process is rigorous, intense and brutal; hence, business plans are rejected without reading past the executive summary. According to Bloomberg, 8 out of 10 small businesses often fail within the first 18 months so VCs are left with no choice but to be aggressive in deal selection process.
Generally, a typical VC investment selection criteria focus on:
Entrepreneur/Team characteristics
Product/Service characteristics
Market characteristics
Financial characteristics
If you are fund raising for early stage round, these fundraising tips might be useful for building the most suitable foundations to accessing VC money.
Tips for Accessing VC Money
1. Get the team right
Everybody has an idea but not all ideas receive investment until refined and backed by the right talent. VCs are interested in founders that are in for the long run with ability to push through against the odds. They are keen to see passion, determination, resilience, attitude perseverance, leadership, and resourcefulness in the team.
One of the first lessons learnt on investment is that smart investors do not necessarily invest in ideas rather they invest in people since businesses/companies do not operate in isolation but are rather operated by people, interacts with people, and managed by people.
2. Build your MVP
As a fund seeker, it is important that your product/business has a unique attribute that differentiates it from every other product in the market.
Your product must provide sustainable solution to existing real-life problems and there must be a working prototype that meets the minimum requirement to delivers value. The product must also be scalable; an IP protection in the form of Patent would be an added advantage!
3. Articulate your market potential
VCs often invest in growth and late stage companies, and occasionally companies at seed stage. Hence, VCs are interested in fund seekers with big market potential as well those with ability to identify hot markets. In simple terms, VCs are looking for companies with exponential growth potential. Your start-up can stimulate VCs interest when these conditions apply:
Potential to realise high market volume
Ability to create a new market and define new buyers
Ability to exponentially expand into existing market
Most importantly VCs invest in familiar markets so they can add value through knowledge transfer, mentoring, distribution networks, operational and management advisory, and access to personal or professional network.
Understanding the VC selection criteria and adopting these tips at the very start of your business journey will make a huge difference in your fund raising journey.
Venture Capital 101 is a series of articles for start-up teams that aim to access VC money or understand the industry. For more insights on the VC process, look out for Part II: The Deal Selection Process.
Babangida Kure Yohanna is a Venture Capital Researcher with experience in Business Analysis, Project Management and Management consulting focused on early stage investment. He is currently a doctorate researcher at Kingston University, London and his research interest spans across Venture Capital, Business Angels, and Crowdfunding. Babangida can be found on LinkedIn and Twitter.