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Factors VCs Look For When Investing In Startups

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October 26th, 2021 21:24

Here's what VCs look for in startups

For an idea to manifest into a startup, it requires funding, and the most sought-after of such funding is that by venture capitalists. But, there are too many startups competing for money. This means that it is important to understand what VCs look for in startups in order to bag their funding. 

VCs are quite famous for their willingness to invest massively in startups; however, before doing so, they require the business idea to be of value to their money. This is because such investment entails high risk.

But fret not! Here is a simple guide to understanding the expectations of VCs and what they look for as investors in your startup.

A formidable leadership to take the lead of the startup

A venture capitalist firm’s assessment of a startup begins the moment the first contact is established which is generally with the leader of the team. Everything from personality and knowledge to passion and courage is under scrutiny.

Does the founder of the startup radiate inspiration with their presence? Does the leader possess adequate problem-solving skills? Is the leader willing to be accommodating for both the investors and the team? 

The crux of the matter is that VCs are looking for a leader who can keep the startup afloat and, in doing so, doge whatever the fierce economy may throw at them.

An equally awesome team to work with the leadership

What is a leader without a remarkable team they can rely on? VCs look for a team that is balanced both in the number of people and the quality of the talent. A perfect team is one which has harnesses a diverse skill set, background, and experience from each member.

The notion is that ideas come and go, but an agile team can pivot through anything. You can learn more about hiring the right talent for your startup here

The unique factor in your startup’s product or service

When a VC firm is evaluating an idea for investment, the uniqueness of the product plays a major role. VCs want to see how your startup plans to set its foot in the existing markets and find consumers to adopt its product or services. Even more attractive is a product that has the opportunity to create a market of its own. 

Your plan of action for the startup

Even with the X- factor and an amazing team of executors, it is the nitty-gritty of your action plan that determines the chances of its success.

When you are asking VCs to invest in your company, you need to present them with a full-proof strategy of how you intend to use the funding to create a successful startup that will bring value to every dollar they invest.

The initial traction of your startup’s product or service

The initial traction of your product tells the VCs about what the consumers think of your product and lets them assess the viability of your idea. Think of it as a guarantee for VCs that their money would be secure. 

Your preparation to tackle any potential risks that may come your way

No idea can be a 100% fail-safe. There is always a little risk when you commence your startup business and the VCs are well aware of this. What VCs are looking for is to see your plan to tackle the risks that the startup will be facing.

Do you understand the principal risk involved? Legal? Technological? Regulatory? Financial? Do you have plans for mitigating them? Do you have any precautionary methods in place? 

It all comes down to the pitch you make 

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The pitch is your final moment to actually present everything we have discussed until now and requires a lot of hard work to put forth your idea precisely and concisely. A good pitch tells a compelling story of your startup which is crisp yet heavy on information. 

The pitch is what will make or break your case with the VCs.

Conclusion

A venture capitalist firm’s investment brings experience, strategic assistance, potential customers, and sophistication that can take your startups to greater heights. So stay hungry, stay foolish, and may the odds be ever in your favor!

Frequently asked questions

1. What are the risks of venture capital?

  • Venture capitalists look for the most common risks when assessing startups namely, market, technical, operational, and financial.

2. How do I find VCs for your startup?

Here is how you can find VCs to fund your startup.

  • Curate a list of VCs who generally invest in similar ventures
  • Select the VCs you want to target as your first choice
  • Do your research on the VC and its past investments

3. What do VCs look for in startups?

  • The most important factor for any VC to fund a startup is a competitive advantage. VCs want to be sure of profits before they make any investments.

4. Is it hard to get venture capital funding?

  • Given the risky nature of their business, VCs are very careful and selective in making any investment. But a good idea that can pass their test of scrutiny will never fail to bag a hefty investment.

5. At what stage of the company does venture capital provides funding?

  • Venture capitalists provide funding to startups at the initial stages itself provided that the idea shows the potential of high growth in the future.




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