4. Innovative Product
Venture capitalists don’t want to see a “me too” or “also-ran;” they want to see a business that either provides a compelling reason for people to change from their current habits, or see something that is truly unique. For this reason, venture capitalists want to see a product that has strong differentiators. They’ll want to see that people don’t have a reason to buy someone else’s product or service instead. If people are already using a similar product or service, why will they want to shift to your product instead?
5. Proof of Concept aka “Traction”
Even though venture capitalists are typically investing in startups or young companies, they still want to see proof that the business is a viable one. This means moving beyond just having a product idea to having proof that someone will pay for it (outside of family and friends). They want to see traction with your core market. This should be a broad segment and intentional, otherwise the VCs will be skeptical.
6. Broad SOM (Serviceable Obtainable Market)
If your product or service is for a very niche market, then chances are a VC fund won’t be very interested. They want to see a large market and see that people are spending (big) bucks in that market. In an article by Forbes, Kathleen Utecht, seasoned entrepreneur, investor, and current Entrepreneur in Residence at Comcast Ventures, Utecht suggests that to attract VCs your market needs to be at least $1 billion.
7. Conversion proof (and the conversion process isn’t too complicated)
Venture capitalists want to see that you can move prospects to the point of conversion. They want to know what the different customer segments are and how you can get to them. They also want to see that there aren’t too many barriers in the buying process and that there is a relatively uncomplicated process for converting clients.
8. Reasonable Cash Burn Rate
Chances are, a venture capital fund is going to take a look at your cash burn. How much do you currently have and how quickly will it run out? They call this your “runway.” Your gross burn rate is the amount of operating costs incurred as expenses every month. If your company is currently earning revenues, then your burn rate will be your revenues minus operating costs and COGS. If you take your money in the bank and divide it by your monthly burn rate, then you’ll get a good idea of your “runway,” or how long you have until you’ve burned through your current cash.
9. A Detailed Plan for How the Capital Will Be Put to Work
This—hopefully—goes without saying, but a venture capitalist won’t want to invest in your business without knowing what, exactly, the money is going to fund. This is where a financial forecast can be incredibly helpful. A financial forecast will detail out where the money will go and when, and will use existing trends and educated predictions to show how this is expected to impact revenues, operating costs, cash flow, and the bottom line. Read more about financial forecasts in this article.
10. Favorable Terms or Downside Protection
In a study published by the University of Chicago Booth School of Businesssurveying 885 institutional venture capitalists, the VCs rated the most important factors in deal structure and how flexible/inflexible they were on each feature. In this survey, the most common deal structure features included pro-rata rights, participation rights, and redemption rights. VCs also tended to be less flexible in pro-rata rights, liquidation preference, anti-dilution protection, valuation, board control, and vesting.
11. 10x Potential
Since venture capitalists are investing in companies that are higher risk, they’re usually looking for 10X exit multiples. This is because half of their investments are likely to be worth zero in five years, and others may return no more than their original investment. In order to provide a reasonable ROI to their LPs across their portfolio of investments, they need to look for businesses that will make up for the investments that don’t return as well (or at all).
When you’re proving this 10x, make sure it’s realistic. Know exactly how you’re going to make those numbers happen (and that they’re comparable with industry standards and similar organizations).
12. Investment Thesis Fit
VCs are looking for companies that fit their investment philosophy and complement their portfolio and brand. This isn’t because they are snooty or overly selective; it’s actually a benefit to the companies they back. By choosing investments that fit their investment philosophy, they are able to concentrate their mentorship in industries in which they have the most experience. This means they’re looking for a business to which they can best add strategic value.
How Can We Help?
Are you in the process of raising capital or in strategizing for a transaction or exit in the future? Preferred CFO can help. Our CFOs are experts in raising capital and can help with providing the essential financial tools needed to present to investors, can help with networking, completing due diligence, and negotiating contracts. Find out more about our services by contacting Preferred CFO today.
This article was originally published in July 2020 and was revised inDecember 2023 for information and relevance.
