How Do Venture Capitalists Choose Which Project to Invest In?

How Do Venture Capitalists Choose Which Project to Invest In?

Getting funding may be hard but it’s not impossible as long as you keep these tips in mind!

For those in the entrepreneurial space, raising funds can be very challenging. Not only is it difficult to find the right investor for your startup, but it is also hard to convince said investor to put money into your venture. 

With over 75% of venture-backed companies failing, the venture capitalist (VC) you approach is taking a serious risk when putting their money into your startup. If only you knew what was going on in venture capitalists’ heads, it would be much easier to generate funds for your next project. Well, no need for wishful thinking! Here are some ways you can convince a VC to invest in your company. 

Is your product generating value?

Perhaps the most important thing that a VC is looking for in a company when investing is whether its product has value for consumers. By value, they mean, what does the product do for the customer? Does it simplify the way they do things on a daily basis and/or help them cut costs? Products and services in different market segments respond differently to these questions. So, for instance, business-to-business products focus on saving time and money. Whereas, for business-to-consumer products and services, the value a consumer gets from a product can range from the time and money they save to its perceived hedonic value (enjoyment people receive from owning a product).

You need to know what your product’s unique value is and be prepared to answer questions about it before you approach a VC. The idea is for your product to fill a gap in the market that no other company has thought of yet. Ultimately, it all boils down to whether the product or service can make a profit. The VCs need to know if your company will generate a profit for them because by investing in your venture, they are giving up a chance to invest their funds somewhere else. 

What will you use the VC’s capital for?

To turn a VC’s no into a yes, you need to be able to tell them what their money will be used for. Whether you intend to use it to market your company, expand your production scale or even hire a larger team, you need to have an actionable plan in place. It is also important to note here that this plan needs to align with the larger goals of your business. 

To give your VCs a better picture of what you’ll do with the funds and your long-term goals, you can prepare a financial forecast. A financial forecast tells how much money is required to keep a business running. They would also want to know your startup runway. The startup runway is calculated by subtracting how much money you have at the beginning of your venture and the speed at which you are using it up. You can use the projections from the financial forecast to explain where money will be going and how that will impact revenues and profitability. 

Do you have a solid team?

In the early stages of investing in a company, the VCs don’t have much information to judge how successful a business will be in the future. So, they focus their attention on the team behind the startup. The VCs would look at the background of the founders to see whether they would be successfully able to execute their vision. If those in leadership positions have been able to generate high returns in their previous ventures, it would increase your chances of getting funding.

For VCs, ideas aren’t quite as important as the teams responsible for executing them. If an idea is good, many companies will attempt to offer similar products or services. So, the question for VCs is why should your team get their money instead of someone else? To successfully pass a VC’s vetting process, make sure you don’t have any weak links on your team. It is, in fact, better to have gaps in the team that you can fill in the later stages of the startup. You could even say that you’ll use the funds they provide you to hire people. Having the right people on board in the right roles will tell them that their money is in reliable hands. 

While it may seem tough to approach the right VCs and give them a convincing pitch, you shouldn’t be afraid of failure. Remember that even if you did fail in a venture in the past, it doesn’t mean that you would immediately get rejected by VCs. They expect some of their investments to fail and might  still be interested in investing, provided that you handle the failure well. Moreover, if you had a good relationship with your previous investors, chances are you will continue to get funding from them in the future. So don’t let failure stop you from trying again. 

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Header image courtesy of Pixabay

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