Before founders get in touch with venture capital funds (VCs), they need to understand what factors have an impact on their investment decisions. As an institutional investor, a VC is interested in a high increase in value of the investment made and therefore, pays attention to various indicators that give reason to assume an exponential growth.
Especially, the following 5 characteristics play an essential role:
- The company offers a unique product that clearly stands out from existing solutions on the market.
- At the same time, the relevant market the product is placed at is huge and leaves a lot of room for growth.
- The company has a resilient plan based on reliable figures.
- Both, in good company phases and in times of crisis, the management is able to lead the company adequately.
- The company has a comprehensible market entry strategy.
In order to give an impression of the information that a VC would generally like to obtain from a company, we provide a list of potential questions in our download area. Please note that the document presents possible and general questions that depend on the business model and industry in scope.
We would also be happy to advise you individually in the course of a personal conversation on questions about financing rounds, the search for investors or company valuation. Get in touch using our contact form or directly arrange your first free appointment with us.
1. The product is unique and much better than previous solutions
A VC thinks big. To do this, it is looking for companies that offer enormous growth potential. As a general rule, a VC aims to generate a revenue at exit roughly equal to the size of the fund. The company should therefore clearly demonstrate that it is able to generate such revenue. A condition for this is a product that is significantly better than existing solutions on the market and stands out from them. A company should therefore explain why the product is unique and, above all, where its unique selling proposition (USP) lies, i.e. what distinguishes it from competing companies.
An investor is also interested in why someone should be willing to pay for the product right now. Also, in addition to the right timing, it is essential for the investor to understand the company's business model. In this respect, the company should be able to explain in a comprehensible way how it earns money or how it wants to earn it in the future. This is a quick way for a VC to see if the business is scalable and worth investing in.
2. There is a huge market for the product with a lot of money being spent in that market
To be eligible for VC funding, the company should be in a huge market with as much room for growth as possible. Large markets tend to be more stable, less prone to volatility, and allow multiple companies to exist in the same segment. In addition, small markets often carry the risk of not leaving enough room for growth, and thus reduce the chance for the VC to achieve an adequate return on its investment, because in order to achieve a possible company valuation of over € 1 billion, the addressable market has to have corresponding potential.
In addition to the market volume and the entry barriers, competition is of particular interest to an investor. In addition to product differentiation (see point 1), the company must prove why there is no other, perhaps larger company that manufactures the product. In addition, the company should deal extensively with its environment and not only keep an eye on existing competitors, but also on those who could become one.
3. Plausible premises form the basis for comprehensible planning
A company has to be prepared for the fact that every little detail of corporate planning will be questioned and put to the test. For this reason, a reliable set of figures is required, which is based on comprehensible assumptions and thus, lays the foundation for transparent planning. A VC is interested in whether the company can draw a realistic picture of its business development over a time frame of three years, as is the question of which metrics the management uses to assess the development. In particular, the essential value-driving premises must be presented plausibly.
In addition to internal planning, an investor focuses on company valuation and capital structure. In this context, an extensive due diligence is essential to assess whether a company is worth investing or not. In addition, an investor will inquire about financing rounds that have already taken place and the current financing requirements.
4. The management is ideally suited for running the company
A VC willing to invest in a company wants their money to be in good hands. The company should therefore take time to present the management and the team. Right at the beginning the question should be answered which person leads the management team and which competencies him or her has. Following up, the team members, their roles and responsibilities and their experiences are presented.
Companies should not be afraid to admit when a position is still vacant. Generally, it is better not to have filled a position than to have filled it inappropriately. An investor will thus be happy to hear that some of the money will be invested in finding the perfect candidate. Also, the management’s visions are important for a VC. In this way, investors are able to assess whether they have enough trust in a management team and whether they can identify with their ideas in the future. This is the only way for an institutional investor to be sure that the management is willing to keep the company going over time.
5. The company has an adequate market entry strategy
In order to get the product on the market, a VC is interested in learning the company‘s sales model. An investor not only wants to see those channels through which the product is advertised, but also those through which actual acquisitions take place. In addition to the question of how customers find out about the product and how new customers can be won, the company should also explain which sales channels are appropriate to launch the product in the relevant market segment.
Marketing can decide the future of the product. Therefore, it is essential for the investor to understand the allocation of the marketing budget to different channels in order to affect an even bigger growth of the product than initially intended.
Although the information that a VC obtains of course always depends on the business model and the industry, it can be concluded that VCs usually obtain information according to their investment strategy. Based on this, institutional investors are looking for unique ideas that take place in large markets and offer high growth potential. It is just as important to have reliable corporate planning in place in order to convey a realistic and transparent picture of your company in the present and in the future.
At Trustventure, we advise young companies on financial issues and offer CFO-As-A-Service. Our expertise in questions of corporate finance, planning and controlling creates transparency and security for you and your investors. Get in touch using our contact form or send us an email via email@example.com.