What are the most important things that investors look for before investing in a start-up? What separates rejects from stars? Here are seven characteristics most venture capital investors look for in a promising venture.
A Proprietary Product, System, Method or Approach
Investors look for surefire indications that the firms they are investing in have a leg up on competitors. While patents, trademarks, copyrights and other trade secrets do not guarantee success, many successful ventures enjoy one or more of these advantages.
A Large Potential Market
What good is a great product or service if the potential market is too limited? In a relatively small market, a venture might have to capture the entire market to be profitable. Most investors look for ventures that operate in markets large enough to result in significant revenues and profits. Large sustainable profits usually lead to greater enterprise value.
Nothing is more convincing than a rapidly growing base of satisfied customers. Well-written business plans, multiple patents and spectacular Power Point presentations are great, but early rapid product acceptance is where the metal meets the road.
A Highly Talented and Experienced Management Team
Investors look for management teams that are talented and that can deliver on their plans. Many ventures fail, not because the business plan is not compelling or well designed. They fail because the management team is unable to execute their plan. Investors are partial to management teams that have successfully executed plans in the past.
A Well Thought Out Plan
Speaking of business plans, a highly focused plan usually precedes a smashing success. Since most investors have limited time to meet with entrepreneurs seeking financing, it is imperative that savvy entrepreneurs put together compelling business plans. In a short well-written plan, they must communicate their vision and business concept in a convincing manner, anticipating and answering the most critical investor questions.
Exit Strategy Venture
Investors usually have limited investment horizons. In many cases, they have raised their money using an investment fund vehicle. The vehicle usually requires them to return their investors’ capital within a certain time frame. Most venture investors have a three to seven year investment horizon. High net worth ‘angel’ investors may have more flexibility if they are convinced that greater rewards will come from a longer investment horizon.
The Potential for Excellent Returns
Investors look for ventures capable of generating the kinds of profits that create significant company value. Financial projections must be realistic yet convincing. Large profits produce high company valuations. Upon an investor’s exit from the investment, a large enterprise value usually results in large investment returns. If you are making plans to tap the venture capital market, keep these points in mind. Focus on presenting a compelling, well-written business plan. Once you get your meeting with investors, be prepared to concisely communicate how your business will become successful.