Venture capital funding is one of the most sought-after sources of financing, with business owners also benefiting from a partnership with experts in their areas of operation. Unknown to many is the immense risk that VC-backed companies endure, requiring lenders to be selective about the businesses they collaborate with. With this in mind, what are some things venture capitalists look for before investing in a company?
Strong Leadership
Good leadership will often be the first thing that venture capitalists look for when investing in a company. CEOs with excellent communication skills and commitment will be essential for any partnership, allowing you to secure a deal. If your management team also possesses great problem-solving skills, is aware of their products, and stays level-headed under pressure, VCs like Brad Kern will likely be more open to getting into business with your company.
Proof of Concept
While venture capitalists typically work with startups, most will be interested in companies with proof of concept. This gives them confidence that their funding will be utilized by companies that can sell products and services to support long-term growth. Take note that having a market outside your family will be essential, allowing you to have VC-backing.
Adequate Cash Burn Rate
Cash burn rate refers to how fast your cash runs out, with a high rate often not a favorable trait. If, for instance, your monthly expenses are more than your revenue, then your cash burn rate is high. A low burn rate indicates that you have enough money to sustain your operation costs, such as payroll, utility bills, and marketing efforts, while still allowing you to stay afloat. This assures venture capitalists of a strong business where incomes exceed expenses for longevity.
Unique Products
Unique products and services will set you apart from competitors, allowing you to stand out when approaching venture capitalists. Operating in a niche market means you will likely have significant market share control, helping you set your prices for maximum profitability. Innovative products will also be a unique differentiator of your business, helping you stay relevant in the long run.
Straightforward Conversion Process
Converting prospective clients to customers should be straightforward, with a long customer journey often being a turn-off. Depending on your products or services, your selling phase should allow customers to make their decision easily, easing the time spent on marketing and product awareness. If there are any complications, this will likely be a hassle for your business, a factor that numerous venture capitalists prefer to avoid.
A Strong Cap Table
A capitalization table refers to the list of shareholders in your company, the amount invested, and the percentage of the company they own. Companies with small investors, primarily family members, are a concern for venture capitalists, as these often come with a higher risk. Due to the low funds invested, companies may experience financial problems in the future, making such businesses unsuitable to partner with. To avoid such a hurdle, business owners are advised to work with financially stable investors, allowing them to have a better cap table. While getting financing from venture capitalists gives you opportunities to work with professionals, VCs will often prefer aligning themselves with companies that showcase high profitability in the long run. Because of this, make it a point to present your best traits to the forefront, with aspects such as good leadership, unique concepts, and a reasonable cash burn rate giving you the best chance at this.
