Venture capitalists (VCs) are private equity investors who provide capital to high-growth potential companies looking for funding. Startup companies require various types of investments for various stages of their business and one way to secure funding is through venture capitalists.
Venture capitalists invest in companies with the intention of gaining a return over the period of their investment, either as convertible debt or as ownership equity. Venture capitalists are extremely beneficial as they help drive growth in a company by providing them with opportunities for expansion, expertise and guidance.
When an early-stage startup pitches their business to a venture capitalist for investment, there are certain factors that they look into before dedicating a part of their finances to the said startup.
These range from problem-solving to growth and other factors, some of which have been listed below:
Innovative Offerings
Although one of the main reasons why venture capitalists invest in startups is the returns that they would receive, they also look at the innovative offerings from these early-stage companies.
The question a startup needs to ask itself before pitching its business to a venture capitalist is whether “Are we solving a meaningful problem through our product or service?”. If the answer to the question is yes, it would be easier to get a venture capitalist to invest as they look for innovation alongside many other factors.
The Growth of Accounts Receivable
Although a company’s financial aspects may determine a venture capitalist’s decision of investment, it is only a small part of the whole process.
When analyzing the financials of a company, venture capitalists also look for a trajectory of growth in terms of the accounts receivable of previous quarters. If the trajectory is moving upwards, it indicates that the company is selling well which is a good sign.
Sales Efficiency
Venture-backed startups value sales efficiency. Startups that sell well without overspending on influencers or advertising and marketing are given preference over companies that invest all they have into sales and marketing strategies. The more natural the growth of the startup, the better it will be for them.
Team Engagement
Since a startup has a smaller team of staff that works towards its success, venture capitalists investing in the business assess the qualifications of its staff members as well. Along with the skills and qualifications, team efficiency and teamwork are also taken into consideration before investing.
Potential Returns
The return that a venture capitalist could potentially make from the investment is assessed by analyzing a number of factors. While growth rate and other finances are considered, market size and the company’s standing play an equally important role in the evaluation of potential returns.
An investor may also expect higher returns while investing in early-stage startups as the growth potential can be immense.
Exit Options
This is an important factor for the assessment of investment in startups. Venture capitalists often look for an exit roadmap. The exit strategy is what gives the venture capitalist a return.
The exit could happen either through the startup getting acquired by a bigger company or through an IPO. Either way, providing the venture capitalist with an exit option might make it easier to secure an investment.
Inquiries About the Funds
Venture capitalists assess the investment amount required as well as what the fund being raised is going to be used for. This is a great way for startups to be creative and use the funding for their growth.
These are some of the several things that are generally assessed when an investment is made into a venture capital startup. Individual investors and venture capital firms might use different assessment tools and strategies when deciding if a startup is worthy of its time and investment.
Although different investors may look for different things, the two things that remain common are the return on investment (ROI) and the exit options.
Therefore, when pitching your business to a venture capitalist, you must ensure to be ready with all relevant data for your company and how it plans to stand out in its field.
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