What Do Venture Capitalists Look For?

You’d like to get venture capitalists to take a look at your company. But how do you do that? What do venture capitalists look for when deciding to invest in a company?

1. Strong management. The first requirement is a strong management team, with relevant experience, drive, self-confidence, and expertise. Many venture capitalists even rephrase the old cliche about what is most important in real estate — “location, location, location.” For many venture capitalists, it’s “management, management, management.”

2. A growing market. The next requirement is whether your company is targeting a substantial and rapidly growing market. Does your company have a reasonable chance to successfully enter the market and obtain a strong market position?

3. A unique product. Does your company have a proprietary or differentiated product? Does your product offer benefits over existing products? Does it have patent or other proprietary protection to forestall competitors? Be sure to read Evaluating New Business Ideas to be certain your idea is a solid one from the start.

4. IPO candidate or acquisition target. Does your company have the possibility of growing quickly and becoming an attractive acquisition target or IPO candidate? Venture capitalists are concerned about how they will realize liquidity and receive value for their investment.

5. Sound business plan. Is your company’s strategy and business plan sound? Remember, most venture capitalists expect to see a well-thought-out, coherent business plan. For an introduction to writing a solid business plan, read Write a Winning Business Plan.

6. Significant gross profit margins. Can your product or service generate significant gross profit margins (40 percent or more)? Large profit margins give a company room for error and enhance its attractiveness for a possible IPO or acquisition.

7. “Home run” potential. Finally, the venture capitalist wants to see the possibility of hitting a “home run” by investing in your company. If your own projections and plans show only modest growth, or if the growth of the business is limited by technology or competitive factors, don’t expect to get financed. Most venture capitalists won’t be interested unless the company can grow to at least $25 million in sales within five years.

If you think your company has what it takes to secure venture funding, take notice of the following advice and then start knocking.

8. Gather information. Find out about the different venture funds’ strengths, reputations, particular interests, and preferences for stage-of-company development. Make sure you are approaching the appropriate venture capitalist for your business or market.

9. Get an introduction. Venture capitalists are likely to be more receptive to a proposal forwarded by someone they know and respect. Convince your lawyer, colleague, or accountant to send over your business plan or make an introduction.

10. Be prepared. When you do get in front of the venture capitalist, be prepared to demonstrate the following:

  • A clear understanding of your business
  • A clear understanding of the barriers to entry and other hurdles of business
  • Drive and ambition
  • Relevant experience
  • A vision for the growth of the company
  • The character, expertise, experience, and skills of key members of the management team.