What Do Venture Capitalists Want to See Before Investing?

by Sean Ross

4 min read

When your business needs capital to get off the ground or continue growing, often times the answer is to pitch to venture capitalists. But getting venture capital isn’t easy. Before meeting with them, it’s a good idea to know what they want to see and hear to increase your chances of getting an investment.

Your Pitch Deck

If you want to be taken seriously by a venture capitalist, the first step is to make sure that you have your presentation prepared and practiced. You won’t get a lot of time in the meeting so it’s important that you have your pitch deck as polished as possible. Unless you have that once-in-a-decade type of idea and have multiple venture capital firms actively competing to meet with you over dinner, it’s unlikely that you’ll be taken seriously unless your presentation is perfect.

A Clear Exit Strategy

Your focus may be to raise capital to grow your business right now. But you must never forget that venture capitalists are looking for a very large return on their investment. Sure, it may take years or even a decade to provide that kind of return for the investors, but one thing is certain: You need to have a detailed and realistic exit strategy for your business. This is very important to the venture capitalist because it’s only upon an exit where the investor gets their money back plus a profit. You need to detail a strategy for either attempting to get acquired by a much larger company or for taking the company public through an initial public offering (IPO). Market research, user statistics, revenue projections, and many other metrics go into creating a viable exit strategy. The venture capitalists definitely realizes that you’re making an educated guess on what might unfold over the years, but having something in place is far better than nothing. Just keep in mind that it’s not possible to plan for an acquisition and an IPO at the same time. As a business owner and CEO, it’s best to choose which strategy you’re more comfortable with, in term of risk tolerance, and build the exit strategy portion your presentation around that. Avoid showing the venture capitalists a plan for each.

A New Technology or Product

There’s a famous Wayne Gretzky quote: “I skate to where the puck is going to be, not where it has been.” You need to demonstrate the essence of this quote by showing that your business is building, or already has, a breakthrough technology or product. Venture capitalists don’t want to see incremental gains on an existing product. Those types of ideas aren’t enough to multiply an investment by 10x, 20x, or more. A truly new idea or product is absolutely essential to have if you want to get venture capital funding.Show the investors that you aren’t just building something that’s slightly new. Prove to them that you can see where the puck is going. Show them that you can anticipate what problems consumers could have in the future and that your business is the business that can provide a unique solutions to those problems. Another way to put this is that you must show the potential investors that your business has, or is creating, an unfair competitive advantage and are completely differentiated from other businesses.

A Large Enough Market

Your business idea must serve a large enough market. Venture capitalists want to see that your company can eventually be worth $100 million, $500 million, even $1 billion. For this to happen, a large enough customer base must be available, and your business must be able to capture a large enough market share of that customer base.Since the business idea is yours, you may be in love with it. But if it doesn’t have enormous dollar potential, the venture capitalists won’t be interested. If your business only has the potential to be worth a few million dollars, it’s highly unlikely that a venture capitalist will spend the time or money investing. There are simply too many other opportunities available to them to make more money. Regarding return on investment, remember that venture capitalists expect at least a 10x return on their capital.

A Solid Team

It’s extremely difficult to build a successful business alone, at least on the scale that venture capitalists want to see. It’s extremely important that you have selected the best co-founders and key employees to be involved. Venture capitalists usually want to see that there’s a long history between everyone involved or at a minimum some work experience together. This is because the team involved with the business basically becomes like family since they spend all waking hours together. Remember to have the major areas covered within your team: the strategic person, the technical founder, the marketer/sales person, and the accounting/financial person.Getting venture capital funding isn’t impossible but it’s a challenge. Venture capitalists see dozens, if not hundreds, of deals each month. To set yourself apart from the other businesses, it’s best to be fully prepared before walking into the meeting room. The pitch, the exit, the product, the market, and the team: These are the key areas you must be able to discuss flawlessly. Doing so increases your chances of getting the money you need.

References & Resources

Related Articles

What’s Changed in the New QuickBooks

The new QuickBooks Online bookkeeping software has gone through quite a few changes. As…

Read more

How to Start a Consulting Business

If you’ve worked in a specific industry or field for any length of…

Read more

Checklist Before Leaving Your Job to Become Your Own Boss

So you’re thinking of quitting your job to become your own boss. In other…

Read more