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What VCs look for? – By Pranav Asoori

By July 21, 2021No Comments

Raising money is hard. You send out hundreds of emails. Exhaust your network. Deliver your elevator pitch more times than you can count. You are tired and frustrated. But finally, it pays off – you get a meeting with a VC. Now what?

When you’re with the VC, you’re going to be asked tough questions. The next thirty minutes can potentially get you funded, so it pays to know what a VC is looking for. Here are the top 4 things that a VC is looking for.  

  • Market: 

Investors want their investments to one day grow into $1B+ unicorns. For that to happen, the market of an early-stage startup has to be big. Investor need to see a total addressable market of at least $1 billion for them to be interested. Or, if the market is nascent, investors want to see proof that the market is growing rapidly or will grow rapidly.

 A strong market opportunity is an incredibly enticing metric for investors.  Most investors want you to succeed. Good investors often imagine and explore the tiny possibility that your startup will grow to be a market leader and succeed.  In that case, they want to see a market that is large enough for their money to be multiplied tenfold. Even in the best scenario, if your startup cannot be large enough, they are likely to be uninterested. 

It’s important to get this market size value through a bottoms-up approach. A bottoms-up analysis is determined by estimating potential sales to calculate the total sales. 

  • Team 

The team makes or breaks the startup. In fact, 60% of new ventures fail due to problems with the team. VCs pay special attention and often rely on their intuition when evaluating the team. A strong team generally has the following traits: 

  • Previous experience:

Investors are essentially making bets when it comes to investing in start-ups. A founder that has successfully exited or IPO-ed before, provides investors with the confidence that they can do it again. This is why it is generally far easier to raise money as a second- or third-time founders. 

Additionally, founders who are experts in certain spaces are attractive. Previous experience and success in the corporate world can translate into success in the startup world. In fact, domain expertise can sometimes be a competitive edge. 

  • A collective vision and passion: 

A clear, collective vision and passion of the venture is essential – more essential than past experience. A study found that teams with limited experience but high levels of passion and collective vision did significantly better than teams with vast experience but low levels of passion and vision. This is exciting and refreshing because you do not have to have an elite MBA or vast swathes of experience to succeed. Having a deep belief in what you are doing and a clear vision of where you want to reach is far more important.

Essentially, you want a complementary team, with a balanced pool of skillsets – a technical lead and a great storyteller are musts, all united with the same passion and vision for the venture. You want relentless, determined people with great communication skills. You want original, strategic thinkers that find a way around obstacles and challenges. And this is not always easy to judge! 

  • Competitive edge

There are always going to be competitors and people who have worked on similar problems. What are you doing different? Why are you better than them? What is the value add that you are providing? Is it significant enough and can you quantify it? And why now? These are essential questions that you need to have a strong answer for.

Understanding your competition and having a defensible edge or moat is extremely important for investors. There are different types of advantages – network effects, proprietary technology, founder advantages, amongst others. Investors need to know that someone else isn’t just going to come in freely and copy your business. 

 

  • What the users are saying & traction. 

A startup that is focused on its users is a startup that grows and thrives. At the end of the day, a startup is solving a problem. If the problem is painful enough and needs to be solved, users will quickly jump onto the solution. Investors want to know that the users love your product. A startup that constantly talks to its users and learns and adapts from their feedback is investor-worthy. 

Additionally, traction is one of the best measures of startup success. While not all startups require paying customers to raise money, some degree of traction is necessary – whether that is in the form of early users, samplers, partnerships or an initial pilot. Investors will often look to what these early users are saying as a gauge. 

Traction and results are the best ways to showcase a startup’s merit. Investors will have countless objections and questions. The best way to prove them wrong is to show them what the market is saying through traction. This is also a great way to prove a team’s ability, especially one that is more inexperienced. A team that is able to generate traction and results is a team that has what it takes to build a successful business. 

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