Sometimes there is nothing more powerful than an entrepreneur’s passion and vision. But when trying to raise venture capital, passion and vision are not enough. You need to define the key criteria that venture capitalists use to decide which companies to fund.
Some venture capitalists and institutional investors have very narrow criteria: Specific technologies at specific stages in specific geographic regions. Others have broader criteria and invest in many technology sectors and geographic locations. Virtually all investors, however, look for certain critical factors in a start-up business.
If your startup meets these criteria, you might be ready for venture capital funding. If not, you might just receive a polite note conveying your opportunity.
1. Compelling Value Proposition
Every entrepreneur thinks their idea is compelling, but very few pitch decks feature truly unique ideas. It is very common for investors to see several versions of the same idea over the course of a few months or years. What makes an idea compelling to an investor is that it reflects a deep understanding of a big problem or opportunity, and offers a solution that delivers extraordinary benefits to clients. This is the essential starting point to interest venture capitalists, but it is not enough. The idea itself does not make you fundable. You need the rest of the ingredients below.
2. A strong team
You may have a great idea, but without a strong core team, investors are unlikely to bet on your business. That doesn’t mean you have to have a full world-class team. Startup founders must have the skills to launch the business and the know-how to attract a world-class team to fill the missing gaps. The solitary entrepreneur, even with all the passion in the world, is never enough. If you don’t demonstrate that you’re willing and able to build a successful team, investors walk away.
3. Market opportunity
If you’re focusing on a product/market opportunity that isn’t technology-based, you probably shouldn’t seek venture capital. Venture capital is typically focused on companies that gain competitive advantage and generate rapid growth through technological and other advantages. Don’t chase areas of the market that are already crowded. Show that you have a beachhead market you can win, then scale from there. Contrary to popular belief, it’s not about market size; it’s about the value you can create. Companies that create a lot of value develop their markets and dominate them.
What makes your technology so great? The correct answer is: there are a lot of customers with a lot of money who want to pay for it. No: There are moneyless geeks out there who think that’s cool. Assuming you have a technology advantage right now, how are you going to maintain that advantage over the next few years? Patents alone will not suffice. You need to be able to convince investors that you will be able to stay ahead of the game with the unique talent or exclusive partnerships you have secured.
5. Competitive advantage
Every interesting business has real competition. Competition is not just about direct competitors. It includes alternatives, “good enough” solutions as well as the status quo. You need to convince investors that you have an advantage over all of these competitors and that you have some form of “unfair” advantage that will allow you to maintain your competitive edge for years to come. A few years ago, entrepreneurs could just say that the existence of competition validates their solution, but today, you won’t get away with it.
6. Financial projections
If the thought of making credible financial projections makes you wince or whine, you’re not an entrepreneur and you shouldn’t be asking investors for money. Your financial projections demonstrate that you understand the economics of your business. They need to tell your story in numbers: what’s driving your growth, what’s driving your profit, and how your business will evolve over the next few years. Be sure to base your projections on reality; look for industry benchmarks and similar companies that preceded them and avoid presenting projections that seem outlandish.
Do you already have strong validation from paying customers? Or is there at least good evidence that your solution will be purchased by your target customers? Do you have an advisory board of credible industry experts? Do you have a credible development or distribution partner within the industry? Do you have beta clients that investors can talk to? The more credibility and customer traction you have, the more likely investors will be interested.
Getting venture capital funding means you need a good grade in all seven areas and an A+ in at least two of them. No matter what the headlines say, raising venture capital is tough. You are competing with many talented entrepreneurs for the attention of a limited number of qualified venture capitalists. You can’t be as good as anybody else; you have to be better than anyone else to get a venture capitalist to fund you. So put in the work to show that you understand what it takes to build a successful business and that you excel in each of these critical factors.
At Pegasus Tech Ventures, we would like to help and support all visionary and passionate entrepreneurs. Realistically, we can’t work with everyone, but if you have the above elements of success, we’d like to get to know you better.