What venture capitalists look for in an investment?
VCs will want to know what milestones — particularly those related to growth and revenue — you will hit and when. If your startup has no immediate plan for revenue, say, because product development will take time, you should be ready to list other benchmarks you will achieve in lieu of revenue.
VC investors are likely to demand a large share of company equity, and they may start making demands of the company's management as well. Many VCs are only seeking to make a fast, high-return payoff and may pressure the company for a quick exit.
With so many investment opportunities and start-up pitches, VCs often have a set of criteria that they look for and evaluate before making an investment. The management team, business concept and plan, market opportunity, and risk judgement all play a role in making this decision for a VC.
VC evaluations of investment opportunities most commonly revolve around a three-pillar analysis: product, market, and founders/team. VC investments are deemed to be high-yield and have high rates of failure.
The main focus of VCFs is on early-stage investment but sometimes, it can also involve expansion-stage financing. Often, equity stakes of the enterprises or companies that are funded by the VCFs are purchased by the VCFs.
Top VCs are typically looking to return 3-5X+ on their entire fund to their LP investors over ~10 years. For this, they need multiple 'fund mover' outcomes in each fund, since many early-stage investments will eventually fail or return only a small % of the fund.
Ability: This is the most cited attribute, with 67% of VCs emphasizing its importance. A Founder's ability is a comprehensive measure of their skills, decision-making, and overall capacity to execute their vision.
Venture capital financing is a type of private equity investing specific to earlier-stage businesses that require capital. In return, the investor receives an equity stake in the business through the issuance of some type of security instrument.
Venture capitalists are in the business of investing money in businesses - small businesses, mid-sized companies and global enterprises - any company that shows potential for significant growth over the short term.
Most larger VC firms ($250m-$2b fund size) want to own 20% of each investment. They'll even often pay a higher price to get that ownership, if need be. Your existing investors will want to do some or all of their pro rata, especially if a good Series A investor comes in.
What metrics do VCs care about?
VCs look for startups that have consistent and high revenue growth rates, as well as positive unit economics (more on that later). Revenue, Revenue Growth Rate (yoy), gross margin %, and pipeline conversion. Another important insight is the trending expansion of contracts within the same customer.
The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards.
Venture Capital is a “power law” business. In other words a business of successful outliers. The general rule of thumb is that one-third of a VC firm's portfolio will go to zero, one-third will break even or lose a little, and one-third will generate all the returns.
Minimum investment amounts in VC funds vary widely, depending on the fund's size, strategy, and target investor base. They typically range from a few hundred thousand to several million dollars.
Setting up a fund may vary depending on the stage the fund would like to invest in, the sector or industry, and the performance objectives for its portfolio companies. Full-time GPs typically require between $20 MM and $40 MM per head in fund size to cover salaries and expenses, assuming a 2% management fee.
If your investors aim to double their investment within 5 years, and no new capital increase occurs in the meantime, your company must be listed or (more commonly) sold for an amount equal to or greater than 2 × €5 million = €10 million, i.e., 10 times the amount invested by them.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns -- perhaps even negative returns. Other years will generate significantly higher returns.
A standard due diligence checklist will include financial, legal, tax, and asset-related data—but depending on the VC fund, deal type, and target company, you will likely add more categories to that list. For example, unlike PE firms, VCs often look more closely at the startup founder.
The most commonly known way is by startup applications and referrals. However, VCs also have tools to find relevant startups featured in the media or social media. If they are interested, they will reach out to see when the startup will be fundraising and build a relationship to ensure they can be part of the deal.
A financial model allows VCs to analyze key risk factors, like the company's burn rate, cash runway, and sensitivity to market changes. For instance, if you're running a biotech startup, your financial model can outline the anticipated costs of clinical trials and the expected timeline to receive regulatory approvals.
What is the most important thing in venture capital?
Market Size and Potential
The size of the market and its potential for growth are important factors that VCs consider when deciding whether to invest in a company. They want to see that there is a large enough market for your product or service and that it has the potential to grow significantly in the future.
There's certainly much more to VC than financial modeling but the skills are critical if you want to succeed in the industry. Venture capitalists need a diverse skill set, including branding, networking, industry knowledge, and financial expertise.
The Sharks are venture capitalists, meaning that they provide capital (money) to companies with the potential for growth in exchange for equity stake. Behind those million-dollar deals the Sharks have thought through all the elements that could get in the way of them making their money back.
As in the seed stage, around 40% of angel investments go to companies in the early stage. This means that 80% of angel investments happen at the early stage or before, so if angel investors seem like an attractive option to you and you have an early-stage company, it's a good idea to strike while the iron's hot.
Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their own net worth.
