Occasionally, nothing is more powerful than an entrepreneur’s passion and vision. However, when it comes to raising venture money, enthusiasm and vision are insufficient. You must master the primary factors used by venture capital firms to determine which businesses to support.
Certain venture capital organizations and corporate investors have extremely precise criteria: they invest in certain technologies at specific phases of development in specific geographic locations. Others have broader investment requirements and invest in a variety of technological industries and geographies. Almost all investors, on the other hand, search for some crucial characteristics in an early-stage firm.
If your business fits these requirements, you may be eligible for venture capital investment. If not, you may just receive a courteous message declining your opportunity.
1. An Irresistible Value Proposition
While every entrepreneur feels his or her idea is intriguing, relatively few pitch decks have really original concepts. Investors are frequently exposed to several iterations of the same idea over the period of a few months or years. What makes an idea interesting to an investor is that it shows a thorough grasp of a significant problem or opportunity and that it proposes a solution that provides remarkable value to customers. This is a critical first step in attracting venture capitalists’ interest, but it is insufficient. By itself, a concept does not make you fundable. The remaining components are listed below.
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2. Stable Team
You may have a fantastic concept, but without a solid core team, investors are reluctant to invest in your venture. This is not to say that you must have a comprehensive, world-class crew. Startup founders must possess both the abilities necessary to begin the business and the acumen necessary to attract a world-class staff to fill up the gaps. Even with all of one’s passion, the lone entrepreneur is never enough. Investors will walk away if you do not exhibit a willingness and ability to establish a high-performance staff.
3. Market Potential
If your product/market potential is not technology-based, you should generally avoid venture money. Venture money is often directed toward enterprises that achieve a competitive advantage and experience fast expansion as a result of technology or other advantages. Avoid overcrowded market sectors. Demonstrate that you can win a beachhead market and then scale from there. Contrary to common assumption, it is not about the size of the market that matters; it is about the amount of value that can be created. Businesses that produce significant value expand and dominate their marketplaces.
4. Science and technology
What is it about your technology that makes it so great? The proper response is that there are several consumers with plenty of money who are willing to pay for it. Not: There are some money-strapped nerds who think it’s cool. Assuming you now have a technological edge, how will you maintain that advantage over the next many years? Patents alone will not enough. You must convince investors that you will be able to stay ahead of the curve as a result of the exclusive talent or relationships you have obtained.
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5. A Competitive Edge
Every worthwhile endeavor faces genuine competition. Competition is not limited to direct rivals. It encompasses alternative options, “good enough” answers, and the status quo. You must convince investors that you have advantages that outweigh all of these competitors and that you have some sort of “unfair” advantage that will enable you to maintain your competitive edge for several years. Entrepreneurs could get away with claiming that the existence of competition validated their solution a few years ago, but not anymore.
6. Economic Forecasts
If the prospect of creating plausible financial predictions causes you to cringe or lament, you are not an entrepreneur and should refrain from approaching investors for funding. Your financial predictions indicate an understanding of your business’s economics. They should communicate your narrative quantitatively: what drives your growth, what drives your profit, and how your business will change over the next several years. Ascertain that your estimates are grounded in reality; conduct study into industry standards and comparable firms and avoid offering projections that are delusory.
Are you already well-validated by paying customers? Or, at the very least, is there compelling proof that your solution will be adopted by your target customers? Do you have an advisory board comprised of reputable industry professionals? Are you working with a reputable development or distribution partner in your industry? Do you have beta clients who can be contacted by investors? The more reputation and traction you have with customers, the more likely investors will be interested.
To obtain venture finance, you must earn a passing grade in each of the seven areas, and an A+ in at least two of them. Regardless of the headlines, raising venture financing is difficult. You’re up against a slew of other great entrepreneurs for the attention of a small pool of qualified venture capital investors. You cannot be simply as excellent as everyone else; you must be superior to everyone else in order to get venture capital funding. Therefore, put in the time and effort necessary to demonstrate that you understand what it takes to develop a successful business and that you excel at each of these important areas.