So you have the next brilliant idea for a startup and all you need now are the funds to make it happen! All too often, entrepreneurs are great at executing the ideation phase, but not bringing the product to fruition due to lack of funds and business experience.
The fact of the matter is that money is what keeps a business running, and not just having money to spend, but being able to generate an actual revenue and prove that your business model works.
It’s not as simple as coming up with an idea and getting money, VCs hear great ideas all the time. There are many factors that apply. Here’s our list of some of the top factors we consider with every investment opportunity. Working through these can help you attract the right investors for your business.
- Quality Leadership – A great leader can make a business run smoothly and will make the best decisions for the company. Bad leadership can take a company down in no time. VCs want to see a strong leader with a clear vision for their business, and determination to succeed. They want a leader who knows his company and product inside and out but is willing to adapt to any input they provide, which brings us to the next point:
- Coachability – Listening to the VCs and anyone helping your company is very important. Many owners are set in their ways and are in too deep to see what they’re really missing. If you’ve seen an episode of “Shark Tank” you definitely know this type of person. The business owners that won’t listen to advice rarely succeed.
- Personal Connection – People love to work with people they enjoy being around and can understand. Sometimes you’ll meet with a VC and there just won’t be a real connection. This is a barrier you likely can’t break through.
- Innovative Product with a Competitive Edge – Let’s be honest here, not every product can be classified as “innovative”. When you really break down what your company does, or what the product is, is it truly innovative? What makes your product different from others on the market? How is it better? How is it worse?
Venture capitalists are not looking for another “Me-Too” company that is doing the same thing as 5 others on the market. Really think this through and make sure the differences with your business are important to the customers/clients, and that this “competitive edge” is unique and strong enough to scale.
- Proof of Concept – Would you invest in an idea with no proof that it works? Real results are what matters. If you’ve never sold your product, tested it on the market, or even developed a sample, a VC likely won’t trust it to succeed. Just because you believe it’s a great idea, and so do your friends and family, doesn’t mean anyone will actually buy whatever it is you’re selling.
- Investments that fit the VCs portfolio – If your business is far from the normal of the venture capitalists portfolio you are targeting, than it’s pretty easy to see that they likely won’t be interested. It doesn’t mean it’s a bad business or model, just that they don’t put money in that industry. Most investors tend to choose investments in a specific industry that they can understand and make the best decisions within.
- Large Market Size – To generate a large enough return, venture capitalists want to see that your target market is a good size and that you’ll be able to do well within that market. Too small of a market (although having a niche is important) will limit the possibility of returns.
- It’s all about the Numbers! – The venture capital firm that is reviewing your business will perform serious due diligence. They want to see how you are spending money, why you are spending the amount you are, if you’re making good decisions with the money, and if you are turning a profit yet or are getting close. They will do a deep dive into all of your financials to see if it all adds up (pun intended).
- Risk assessment – There is always a certain amount of risk with any company. If your company makes autonomous cars, there’s high risk because your vehicles could injure or kill a person creating legal issues that could take the company down.
A VC will assess how risky the investment is and weigh this into the equation. Another type of risk comes in the form of new regulations that may affect product sales. The autonomous car is another great example of this as new laws could greatly affect sales and feasibility.
- An in-depth plan explaining how you are going to use the capital infusion – You’d want to know where your money was going if you invested in someone’s company, so it only makes sense that an investor would like to know as well. Provide as much detail as possible so they can rest assured you aren’t going to take all the money and dump it into a facebook ad campaign that you made in 5 minutes…
- Prior investments, a clean cap table – Your capitalization table shows how your company is broken down and where money has come from in the past. Investors want to see a cap table that is relatively clean, as opposed to one with 30 different family members all investing a small chunk of funds. This is something you’ll want to think about before you even start the company, and if yours is already very complicated, consider options for cleaning it up.
Spending time up front to learn as much as you can about the investment process is well worth it for your best chance at securing funds. The difference is clear to the investor who is far more likely to work with you as long as the above points are well addressed. Good luck in your ventures and be sure to reach out to Stout Street Capital if you believe your business is a great fit for our portfolio.