What venture capitalists will ask before they invest

What Venture Capitalists Will Ask Before They Invest

Linkilaw Business Finance

Are you familiar with this situation? A bootstrapped startup with a successful business idea and a promising track record which needs an infusion of funds to take its vision to the next level.

There are various alternatives for funding your business operations. Venture capitalist investment is one of these options.

A venture capitalist (VC) is an investor that provides capital to firms exhibiting high growth potential in exchange for an equity stake. VCs are willing to risk investing in startup ventures because they can earn a massive return on their investments if these companies are successful.  However, they also experience high rates of failure due to the uncertainty that is involved with these ventures.

For this reason, Venture Capitalists want to be absolutely sure what they are investing in. The process involves VCs asking hundreds of questions and discovering every intimate detail of your business.

You will need to be ready and have the answers.

  1. What’s your market size today and its growth potential? 

VCs will want to know about the market for the product or service you’re selling. You need to be able to provide figures to show how big the market is and if the market is growing, you need to be able to show the rate of growth.

You’ll also need to look at what’s called the ‘addressable market’. This means looking at, not only the number of consumers or business that make part of the market but how many of them have a need for what you sell and match your target audience.

If you can show this with accurate data, VCs will listen.

  1. Why You?

Why are you going to be the next billion dollar company and not someone else or your competitors? This can seem too extreme but you should question this to yourself really seriously. What makes your product or service unique.

‘Unique’ means not only different and new, but also hard for a competitor to replicate.

This can be by having a product completely different, by having a new and more efficient process, by pricing or by finding a niche, a market in which your product or service is the perfect fit.

The important thing is to have and keep developing strong differentiators.

  1. Do you have a solid management team in place? 

The backbone of any successful business is not its idea but the team putting that idea into practice.

The VC will ask for details about everyone on the management team, and will want to meet the players. Venture capitalists want to see a cohesive, engaged and passionate team in action.

They must see evidence that your team is flexible enough to adapt. If this is not the case, don’t try to hide it, lies have short legs.

  1. Is your venture a good fit for their investment philosophy?

Every venture capitalist has an investment philosophy.

Some VCs are strictly in it for the return, others take a strategic approach, looking to support startups that will benefit their parent companies and others focus on social enterprises.

So if you are looking for their money, you need to know what their investment philosophy is. Relevant background research always helps before pitching the idea to potential investors.

  1. Back up whatever you tell them with metrics and solid evidence.

VCs love to ask why. You will need to back up everything you tell VCs with metrics and solid data.

If you are not sure about the answer to a question, never give away information without checking it. The best strategy in these situations is to simply say you will get back with the required information.

Evidence doesn’t just come from facts and figures, it also comes from other sources like customer testimonials. Make sure to include them.

Also, only having complex spreadsheets, graphs and numbers can be boring. VCs are humans so, as with many aspects of successful businesses, we encourage entrepreneurs to adopt a storytelling approach to your pitch. Create a good story to communicate your pitch and effectively sell the idea behind your startup  – after all you want this pitch to be memorable and different.

  1. Venture Capitalists want you to be able to explain how you are going to use their money.

A VC investor needs to know in detail how you intend to use their money.

Will you invest in advertising? Will you hire new talent? Will you use the funds to acquire a business?

The investor needs to know what you plan to do with the money, and how your plan fits with your goals.

Keep the above points in mind to help keep focus when your startup seeks funding. But the most important from all of this is not to be defeated by failure – don’t let rejection lead to dejection. The difference between those who make it and those who don’t is often persistence..

If you need help with your fundraising, book a call with our legal team and we’ll guide you through every stage of your legal needs.

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