5 Things Venture Capitalists Seek Before Investing – Aegon Life

Apr 08, 2019 | 2 weeks ago | Read Time: 3 minutes | By iKnowledge Team

Venture capitalists try to find the best match for their investments. The two basic ingredients for a winning match is a great idea backed by an entrepreneur’s commitment and a talented team.

 

Out of 200 proposals that a venture capitalist receives for funding requests, only a couple get to the final stage of approval. Considering those statistics, you can imagine the kind of screening and sifting that VCs have to do. Even with all the sorting and weeding that takes place to find the best investment target, there’s no guarantee for the VC that the venture will be a success in the long run. The start-up landscape is littered with the carcasses of businesses that were stillborn, or sputtered for a while before dying out.

Sometimes they have to go on gut instincts and all the time on hard facts and figures. Entrepreneurs have to convince the VC that the business they are planning to do is feasible, that there is a demand for it, the market size is sufficiently large for its existence and so on. The two basic ingredients for getting funding remain the same – a great investment idea backed by a talented team.

Remember the VCs have the mandate to find and fund a venture so they are willing to be convinced about the start-up idea. The VCs need the start-ups as much as the start-ups need the VCs. It is a symbiotic relationship.

Whatever the process they use to get to the last stage, there are some fundamental attributes and qualities that they look for in an entrepreneur.

 

  1. The entrepreneur’s passion: The entrepreneurs or the founders are the key to any venture. If they have the commitment and drive to do what they want, they can make it happen. According to MJ Aravind, former partner with Artsan Ventures, VCs “assess founders in terms of access to the decision maker, speed of decision making, security and collateral requirements, and financial and emotional lability.”[1]

 

  1. Initial seed capital brought by entrepreneur: Venture funds like it when founders or the entrepreneurs bring in their own funds as initial capital. This shows their commitment to the venture and their faith in their idea. In fact, they give weightage to whether it is their own funds or funds borrowed from a bank or others. The idea is that if the entrepreneur is not willing to put in his own capital into the venture, then he should not expect others to stake theirs. On the other hand, if the entrepreneur has taken pains to raise money with all his resources, it shows a level of commitment that comforts them.

 

  1. The idea: The start-up idea is very important. Is it still a concept or is it already proven? Does the idea solve a problem and how big is the problem? How much has the entrepreneur already worked on the problem? According to Mick Twomey, president and COO of Hyperlift, “Bringing a customer to the table to vouch for your product, even if it’s in beta, and ideally sharing some ownership of the product roadmap narrative can truly set you apart with investors.”[2]

 

The VCs like to see how much homework the entrepreneurs have done in assessing the market demand for the product or service they are planning to provide. It is a pointer to the entrepreneur’s passion for his idea and the time he or she is willing to devote to it. A vaguely sketchy idea about what they want to do will not suffice. While VCs like to look at the numbers and run the analytics, they also rely a lot on their gut instincts as we said earlier. Conveying the product’s sense of urgency is important.

 

  1. Who are your team members: Depending on your idea, investors would like to know what other skill sets are available to the entrepreneurs. The team that is going to be involved in the venture is very important. The entrepreneur provides the vision and may already possess the basic domain expertise required to start the venture, but there are always other parts to the business that require a different kind of expertise and knowledge base.

 

  1. Growth and exit strategy: It is not enough to have an idea and show that it is workable. When VCs invest, they do so with a long-term investment vision. They also like to have an exit strategy. VCs are not promoters and they have other ventures to fund. They need to exit a venture after sometime and make good returns in the process.

 

The entrepreneur needs to show how the business can be scaled up in the next two to five years. The growth strategy is very important. Exit strategy can be in the form of an IPO or a partial stake sale to a strategic investor. In most cases, it is an IPO.

 

With the entrepreneur generally giving up a stable salary to pursue his passion, it is essential that he is able to protect his family in the case of a tragedy that can include a permanent disability or even death. In such a case, he must consider cost-effective yet comprehensive insurance solutions such as a Life insurance plan


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