What are the Investment Criteria of a VC Firm?

Being funded by VC firm has been glamorized in the past decade- and it’s no wonder why.

Venture capitalists offer remarkable funding for young and innovative businesses. They also bring a fruitful partnership with stalwarts and seasoned professionals with a proven ability to develop and grow a business.

Reality check

It has been seen that less than one percent of companies have raised capital from venture capital firms. VC money is essentially unicorn money.

However, investments of VC firms tend to be quite a high risk, with the majority of VC-backed companies failing to return their capital. Hence, venture capital firms tend to be exceptionally selective about where they place their money. With innumerable companies seeking startup funding, competition for funding from venture capital firms stands to be quite fierce.

Vital Aspects Venture Capital Firms Consider Before Investing

So, what do venture capital firms look for before investing in a business?

While crucial, simply having a ‘brilliant idea’ is not adequate. Numerous additional factors weigh into business or startup funding decisions, including the team, proof of concept, size of the market, and terms of investment.

Here is an extensive overview of the vital aspects:

1.  The Team

The elite investors around the world evaluate numerous pitches every day. However, it is crucial to remember the startup companies that become successful are those with exemplary founding team members who leave no stone unturned to take their products from ideation to creation.

When assessing startup teams, venture capital firms prioritize the below-enlisted qualities:

  • Talent– Does the company that requires startup funding have the necessary skills to succeed?
  • Experience– Where did the team hail from?
  • Passion– Does the team possess the grit to persevere through various highs and lows?
  • Adaptability– If needed, can the team pivot?

2.  Size of the Market

The businesses that target a large and addressable market essentially hook the attention of venture capital firms. For small business investors, ‘large’ implies a market that can generate $1 billion or more. To receive the large returns they presume from investments, such firms want to make sure that their portfolio companies have a chance of augmenting the sales worth millions of dollars.

The greater the market size, the greater the likelihood of a trade sale, making the business even more appealing for firms looking for feasible ways to maximize their ROI.

3.  A Clean Cap Table

As a general rule, when venture capital firms assess a company, they choose to see a limited number of investors and accredited investors.

Before funding a business in Africa, these companies will want to analyze a capitalization table (list of shareholders, how much of the company they own, and the amount they invested).

A messy cap table denotes a huge turn-off and accelerates the risk of conflict in the future. Like countless business persons, you may also aim to walk a thin line to secure the much-needed capital early on without adding any extra load to your cap table.

4.  Pioneering Product

To receive funding from small business investors, it is crucial to think outside the box. Venture capital firms desire to invest in a business that either offers a compelling reason for people to change their present conduct or see something truly exclusive. So, you must have a product that has strong differentiators.

If people are already using a similar service or product, why would these investors shift to your product instead? It’s time to think about that!

5.  Traction or Proof of Concept

Although venture capital firms essentially invest in young companies or startups, they still desire to see that your business is viable. This implies that if your business requires startup funding, you need to move beyond simply having a product idea to having proof that someone will pay for it.

They aim to see traction with the core market. This traction should be always an intentional and broad segment; or else, the VCs will be skeptical before investing.

6.  Conversion Proof

Before making any startup funding decision, VCs want to see that you possess the ability to move prospects to the point of conversion. They desire to know the various customer segments and ways you can get to them. They aim to ensure there aren’t countless barriers in the purchasing process and a relatively simple process exists for converting clients.


The Bottom Line

The rewards of an exceptionally successful, high-return investment can be easily spoiled by money-losing investments. Thus, before endowing money into an opportunity, venture capital firms invest considerable time vetting them and looking for key ingredients to success.

They desperately aim to evaluate whether the product has what it takes to rake in moolah as they desire to scale down the riskiness of the prospect.

Are you, too, in the process of raising startup funding or in strategizing for a transaction or exit in the future?

Blaq Ventures can help!

Popularly known as the saviors for Africa’s upcoming unicorns, Blaq Ventures can bring forth the turning point for your business as a VC firm. We assist you with pre-seed funding, game-changing mentorship, and strategic connections.

Put an end to all your startup funding dilemmas today with Blaq Ventures VC firms!