17 Factors Venture Capitalists Evaluate Before Investing in Your Startup

Do you know how to attract venture capitalists to fund your startup business?

Fundraising for a startup is no easy task. There are many variables to consider before you set out on a fundraising campaign to attract potential investors. But, before you embark on your fundraising quest, you need to ensure that your startup business is ready to face the onslaught of questions that potential investors will have.

First, you need to get your basics right. You need to know the type of investor you are targeting so that you get a better idea of what they will expect from you in return for their investment. Of course, all investors expect financial returns, but is that all there is to it?

What’s the difference between a venture capitalist and an angel investor? Are they one and the same? No, they are not.

Now, you might be thinking that it doesn’t matter what sort of an investor you get, as long as they bring the dollar bills, yo! This kind of thinking can be detrimental in the long run.

So, in this blog, we will discuss in detail the significance of venture capitalists and ways you can convince one to invest in your startup.

What is Venture Capitalism?

As a startup trying to find its footing in the business world, it is important that you know about the different kinds of investors. Knowing how different investors operate will help you find the right partner for your tech business and open more doors in the future.

So, the main difference between an angel investor and a venture capitalist goes like this. An angel investor invests his or her own money in hopes of making a profit. A venture capitalist basically raises money from other people, called LP’s (Limited Partners), and invests in various startup businesses to diversify their portfolio and reduce risks. This basic difference sets the tone of your interactions with these investors.

A rule of thumb is that if you’re looking for an investment less than one million dollars, then you need to look into angel investors. If your funding requirements exceed one million, start preparing your pitch for a venture capitalist.

Now, LP’s might be individuals or organisations who write fat checks to venture capitalists in the hopes of cashing in even bigger checks at a later date. LP’s set expectations and the venture capitalists need to return the funds they collected with interest within a certain amount of time.

It is their responsibility to ensure that the parties who back them financially get a healthy return on their investments. This is why venture capitalists often only invest in startup businesses that have already gained some traction in their intended marketplace.

Every startup comes with its share of business risks, which explains why banks are usually hesitant to invest with them. A venture capitalist is not deterred by these risks, as they expect 3 out of the 4 startups they invest in to fail. Of course, this means that they also expect to cover their losses with the profits they make from the 1 startup that succeeds out of every 4. It is up to you to strive to become one of the successful ones.

So, here is the million-dollar question!

Suggested Read: A Beginner’s Guide to Why Startups Fail and How To Make Them Successful.

How Can You Convince a Venture Capitalist to Invest in Your Startup Business?

Venture capitalism is a high-stakes game. The risks are high, but the profits venture capitalists stand to make are also very high. A venture capitalist will happily invest in your business if they are convinced that your business risks outweigh your business benefits.

We’ve put together a list of criteria that venture capitalists look for when they are considering a potential investment. Read on to understand how to prepare your startup business to be investment-ready in the eyes of venture capitalists. You can analyse how many of these criteria your startup meets and take notes on the ones you need to work on as a business.

Let’s walk a mile in the shoes of a venture capitalist and tackle some of the questions they will expect you to address regarding your startup business.

What is Your Great Business Idea?

It shouldn’t come as a surprise to you if this is the first question that is thrown at you by a potential venture capital investor. Even though you have a business that is up and running, your investors will want to start from scratch and work their way up.

• • • What is your business idea?
    • How did you come up with this idea?
    • Were you trying to address a niche demand or trying to improve an existing product?
    • What makes your startup business idea a great one?

You must be able to present yourself in a clear and concise way to avoid any confusion. Write down your points beforehand, so that you don’t miss out on any important information. Try to refrain from haranguing your investors or beating about the bush: get straight to the point and hook your investors with a carefully prepared speech about the benefits and potential of your startup idea.

Does Your Startup Idea Have Potential?

If you’ve managed to successfully hook your investors with your business idea, it’s time to reel it in! You need to convince your venture capitalist investor that your idea not only sounds good on paper but will also hold up in court! The next question your to-be investor will probably ask you is how much potential your idea has.

• • • Have you identified a good market opportunity?
    • Does your business successfully address a niche problem in your targeted marketplace?
    • What makes you think your business idea will hold its own in a competitive environment?

As we mentioned earlier, venture capitalism is a high-risk, high-reward game and investors are chiefly interested in one thing: profits. Venture capitalists invest in businesses in clearly defined stages, starting with a seed investment which progresses till you’re ready to move to an IPO (Initial Public Offering) level.

You need to show them that your startup can deliver exponential returns on investments in the long run to procure sustained investments.

What is the Business Model You Implemented for Your Startup?

A business model forms the crux of your business operations. You need to finalise a business model before you can start preparing a business plan to grow your business. Potential investors will be interested to know the business model that you have adopted for your startup, as it will give them a sense of the direction your business is headed in.

• • • Did you choose a business model that aligns with the unique business needs and goals of your startup?
    • Have you done enough market research and competitor analysis to make an informed decision about the business model you opted for your startup?
    • Did you build your business plan around your business model?
    • How can you prove that your game plan has merit?

Having a clear idea of your startup’s business model will help you predict your revenue generation as well. For example, if you decide on a subscription business model for your startup, and you have an approximate idea of your conversion and retention rates, you will be able to predict your annual sales graphs. This will give you a huge advantage while pitching to potential investors.

What Are the USPs of Your Product or Service?

A USP or Unique Selling Point or Proposition is self-explanatory. What makes your tech startup stand apart from your competition? That is, what are the unique selling points of your business that will put you on the commercial map?

How do you ensure that you offer tailored services to your end audience? What are the special features or innovations that you have incorporated to attract your target audience?

Your USPs will tell your brand story as your business becomes full-fledged. They are the core identifying features of your startup, which will make your company and your offerings distinctive in the world’s eyes. You need to make sure you know what your USPs are, and how you can market them to attract consumers.

Be ready to explain your USPs and their marketing potential to your potential inventors. These USPs will convince your venture capitalists to place their faith in your ability to engage your audience.

What is the Technology Stack You Used for Your Startup?

If your potential investor has done their research, they will know to ask you about the technology stack that you have selected for your business. Also known as the solutions stack, your technology stack will include all the technology services that you choose to utilise to build your startup’s product. The tools in your initial technology stack will ultimately play a crucial role in your scalability in the future.

Some of the questions investors ask can include the reasons for your selection of a particular technology stack.

• • • Is your technology stack sufficiently differentiated?
    • Have you made allowances for scalability?
    • Are you utilising the latest technology to curate your products?
    • Are your developers well-versed in the technology stack that you are using?
    • Is your technology stack economically viable for your business?

It would behoove you to keep an eye on your competitors’ preferred technology stack so that you can explain to investors how your stack will give you an advantage over your competition.

Have trouble deciding whether to hire a full-stack developer or a team of specialists for your business?

What Are Your Notable Achievements Till Date?

Venture capitalists are concerned not only about the money they stand to make from your business (although that is a crucial factor that determines their interest to invest with you). They are also on a mission to fund innovative ideas that push the tech world to break boundaries. Investors will want to know how you are faring as a business and what you have managed to do so far.

• • • How far along are you on your startup journey?
    • What are your most noteworthy accomplishments?
    • Is your business plan helping you cover the milestones you set out to achieve?
    • What is the traction that you have managed to achieve so far with your audience?

Investors will be more convinced if you have proof of concept to back up your business idea. Do you have a prototype that you can show them? Or perhaps even an MVP (Minimum Viable Product) that can demonstrate your business offerings?

Have you managed to build a customer base yet? If so, how is your audience reacting to your products? What is the feedback that you have received? Are you working to incorporate those feedback to improve your overall services?

Make sure that you have the proper data and resources to back up your claims because no inverter will just take your work for it. You need to show them your progress with analytical reports to support your words.

How Efficient is Your Management Team?

Investors will want to know as much as possible about your management team, because they know that management can make or break a startup business. All the perfect planning in the world won’t be able to save your software development project if you cannot manage and execute your project plan effectively. In fact, poor management is one of the key reasons for the failure of many startup projects.

• • • Who runs the show?
    • Do they run it well?
    • Is your management committed to your business growth?
    • How well do they manage it?
    • How organised is your management?
    • What is the hierarchy in your business?
    • Who are the founders, the key members, and stakeholders involved?
    • Do you have at least one technical founder?

It’s possible to get some market traction even with a sub-par management team. This is a fluke, make no mistake, and will not fly in the long run. If your management is not up to the mark, consider replacing the team with a more effective one before you present your business to venture capitalists.

Read on: Why Are Technical Co-Founders So Necessary to Startups?

Do You Understand Your Finances?

Budgeting is an integral part of your business plan. Venture capitalists will test you to see if you understand the nuances of your budgeting strategies. They would not want to invest their stakeholders’ in your business if you cannot prove to them beyond doubt that you understand your finances and are capable of handling it well.

You need to streamline your budget plan and know it inside and out before approaching a potential investor.

• • • How much money will you require to get started?
    • How much capital will you need to invest in your technology stack?
    • What percentage of your budget goes into financing your product development?
    • What are the salaries of your teammates?
    • How much money have you set aside for marketing and promotional purposes?

Your budgeting will also help your investors analyse the feasibility of your requirements in comparison with their other investments.

Are You Passionate About Your Idea?

This might seem like an unimportant question to ask, but you must understand that passion is one of the first things investors look for in a startup. You need to convince your potential investors that you are passionate about your startup idea. Because if you are not enthusiastic about your business, how can you expect others to be?

Do you have a burning desire to bring your dreams to fruition? The determination to bring your vision to life or die trying (okay, we’re being a little dramatic here)?

Outline your vision and your startup’s ultimate mission. Are you on the right track to fulfilling your mission? If not, how do you plan to rectify your shortcomings?

You need to be able to give your potential investors a clear-cut picture of your organisational goals and the fire that drives you to wake up each day and push your business higher up the startup ladder.

Suggested Read: Top 11 Time Management Tips for Entrepreneurs to Boost Their Productivity.

Are You a Reliable Stakeholder?

Why should a venture capitalist trust you with their money? Can you prove your credibility? Do you have anyone who can give you a sound recommendation?

Venture capitalists are flooded with pitch decks daily. While some of these hold merit, many will just be people taking a shot in the dark or fraudulent agencies. You need to prove to your investor that you are a trustworthy candidate for their funds, who can guarantee them returns for their investments.

It will be highly beneficial if you can get credible individuals to vouch for you. Can you find a respected lawyer or professor or even an angel investor to support your authenticity and reliability?

You need to assure your potential investor that it is a wide decision to place some of their financial eggs in your startup’s basket.

Is Your Business Pitch Deck Appealing?

You must be familiar with the saying, “The first impression is the best impression.” Your business deck is the first impression of your business that you give to potential investors. A pitch deck, also aptly referred to as a startup or investor pitch deck is an amalgamation of your business efforts. It should contain vital information about your startup and must be designed to impress.

Consider these questions:

• Is your pitch deck visually appealing and professionally presented?
• Is it hastily put together as an afterthought or a well-researched presentation that will sway investors in your favour?
• Does it reflect your passion and your drive to excel?

Your business deck is incomplete without some crucial elements such as a value proposition and a revenue model for your business. You also need to make sure that you have done proper market opportunity research to identify a problem and a unique solution for that problem.

It’s also a good idea to include your startup’s traction, your marketing strategy, and finally, the details of your team. Remember that the main purpose of a business deck is not to get funding, rather, it is a calling card that gets you another round of interviews with your potential investors.

What are the Main Business Risks You Expect to Face?

Risks are potential threats to your business. These risks can be financial, judicial, technical, or product-related in nature.

Business risks can slow down your business’ growth or even stop it altogether if not found and remedied immediately. It is not surprising that investors will emphasise the risks that you expect your business to face and your strategies to mitigate them.

Have you identified all possible risks that your business could face? Can you guarantee that these risks do not pose a threat to your business continuity? Have you planned to manage your business risks? Do you have strategies in place to detect, analyse, and mitigate all potential business risks?

If your answer to any of the above questions is no, then you need to take a step back. Approach potential investors only after you are prepared to say yes to all the above queries.

How Will You Utilise Your Venture Capital to Further Your Cause?

Investors will definitely want to know what you plan to do with their money. After all, you cannot expect a venture capitalist to fund your startup and then forget all about the money that they invested in your business! Investors have set up expectations among their stakeholders that they need to meet once your startup starts making profits.

Why do you need funding? How do you plan to use your funding to improve your business? What are the outcomes you expect?

Investors will also want to know your capital requirements and your expected burn rates (the rate at which you will spend your venture capital for overheads before you start generating profits). As mentioned previously, venture capitalists invest in your business in stages.

Knowing your initial capital requirements will help them understand how much to invest in the seed stage. If you can convey your burn rates accurately, your investor will know when to fund the next stage of your startup business.

How Realistic is the Expected Valuation of Your Startup?

Investors will want to know your expected financial projections so that they can analyse if your expectations are realistic or more on the sandcastles-in-the-air side.

It is crucial to get your startup’s valuation before you try to attract investors. Your company’s valuation report will help you understand how much of your business equity shares you will need to give to your investor in exchange for seed funding. It will also give your venture capitalist investor an idea of how much return of investment they can expect from your startup in the long run.

Ensure you do not come up with an unrealistic valuation report, as investors will quickly lose interest. Remember that most venture capitalists have been in the startup industry much longer than you have and have experience working with various startups. They will be able to tell easily if your valuation is realistic or if you need to get your head out of the clouds.

Does Your Business Give Back?

Your potential investors will also consider the social responsibility of your business. Are you doing your part to give back to society?

It will work to your advantage if your business strategies also incorporate social responsibility and you have made provisions to ensure that you give back to your community. You can give back to your community in many ways, and not all of them require a big capital.

Giving back can also be in the form of raising awareness about important issues, spreading knowledge and information through paid internships or webinars, and supporting charitable causes.

Altruism is an added plus to your pitch deck. Venture capitalists themselves make it a point to try and further the tech industry’s future and give back to society as much as they can through their investments.

Is Your Startup’s Intellectual Property Well Protected?

The intellectual properties of your business are defined as the intangible properties that your team has created. It can include new ideas, innovations, and  technical breakthroughs, among others.

You need to ensure that your intellectual properties are protected against external threats that may try to duplicate or improvise on them. Investors will want to make sure that your intellectual properties are properly safeguarded, as it can spell disaster for your startup if your competitors get their hands on your confidential ideas. You can do this with properly implemented NDAs (Non-Disclosure Agreements) and other similar legal formalities.

You can also sway venture capital investors in your favour if you manage to patent your ideas at the earliest.

Are You Legally in the Clear?

Legal issues are cumbersome and can impede the growth of your business or even bring it to a complete standstill. This will make you bleed money, which won’t sit well with your venture capitalist investors.

Be ready to face questions about the legal aspects of your startup business. Have you made sure your contracts are watertight and address all legal contingencies?

You also need to make sure that your startup adheres to the compliance standards set by your industry. Implementing proper compliance solutions will also ensure that your business interests are safeguarded against any unprecedented emergencies.

Conclusion

The venture capitalist you partner with will define the rest of your business trajectory. As a rule, venture capitalists expect equity shares that correspond to the amount they invest in a startup business. This can range anywhere from 10 to 80 percent. So, it’s important to make sure that you manage to get the venture capitalist of your choice on board with your business idea. You can do this by making sure you leave no stones unturned when preparing to address the questions and concerns of your potential investor.

You will also realise that it will be hard to grow as a business if your venture capitalist investor is not the right fit for your business. You may be closed off from some opportunities simple because you chose an investor who finds it hard to understand your organisational goals. On the other hand, you will find that it is easier to find more avenues of expansion with the help of the right partnerships.