In the context of an ever-expanding startup environment, venture capital (VC) funding is often integral to the success of many companies. This article will discuss the aspects important to venture capitalist when deciding on a business investment, what an entrepreneur needs to consider while selecting a venture capitalist, and case studies of both successful and failed VC investments.

Important Factors For Venture Capitalists Prior To Investment

Venture capitalists do not simply invest in any startup that seems to be promising. It is essential for them to consider multiple factors and ultimately attach an appropriate value to the business. Given below are the primary factors VCs review prior to investing:

Team Strength

The educational and professional background of the team is important for venture capitalists. They ideally look for:

Qualifications and background of the personnel involved in the business.

Prior experience in the core industry of the startup or in similar supporting industries. A well balanced and seasoned team enhances the probability of success.

Innovative Product

A VC will fund a new product that they believe has the scope to solve one or more big issues. They pay attention to how your product can change the marketplace for the better.

Revenue-Generating Potential

VCs focus greatly on tracking whether or not a business has the ability to consistently bring in income. Every VC hopes that cash flow will be seen eventually.

Business Model

One business model does not capture all the information necessary to make a business sustainable. The key points which need to be addressed by VCs are:

How revenue will be captured.

How operational revenue will be paid.

How profit will be taken.

Leadership Ability

The leading skills are important for the founder and chief executive officer to deeply analyze them. Often at the early stages, the founder acts as the Chief executive officer (CEO), who may or may not be the same person. VCs expect proper leadership because they must drive the business toward achieving its goals.

Market Size and Potential

The size of your target market as well as the product’s best fit in the market is very important. VCs will easily want to know about the size of the market together with the possible scale of your product.

Progress Achieved

VCs gauge the progress that has been made by the company, taking into consideration:

Sales.

Product shipments.

Production activities in the market.

Competition Landscape

VCs analyze the level of competition so as to understand the market environment in which your business will have to compete. High competition may result in low chances for growth and low profitability.

Project Cost and Expected Return

VCs take too much interest in the budget and other details. Information regarding project costs, expected profits, and income, profits, and spending in the last few months is of great importance.

Funding Priorities

VCs will take a look at your funding needs and see if it is possible for them to satisfy those needs. Some funds are limited in how much they can invest and therefore this alignment is very important.

Valuation of Prang

Business valuation is certainly subjective, however, VCs would like to make sure that your company’s valuation is realistic rather than exaggerated. This is mostly addressed in the conversations among the entrepreneur and investor.

Equity Distribution Capitalization Table

VCs have a look at the equity distribution and the company’s capitalization table. Most investors do not want to invest in companies that have overly complex ownership structures and large numbers of shareholders.

Investment Exit Strategies

An exit strategy is always needed for VC’s in order to anticipate paying themselves back on their investment. They usually want to see how you plan to allow others to buy into your company, form an IPO, or further.

Burn Rate On Cash

VCs will assess how many dollars a month your company is burning through. If your spending exceeds what you earn, this does not look good for potential investors.

Technological Assets in Use

The technology that are being deployed in your business is also important. Ventures capitalists want to know that the technology is scalable and that there are adequate growth support strategic alliances.

What to Keep in Mind When Selecting a Venture Capitalist

As an entrepreneur, deciding on a partner requires significant groundwork on your side before going down that road with a VC. Here is some of the most fundamental groundwork that should be done prior to taking that plunge.

Investors approach

Always strategize your time with the VC investor by planning what you think should be done and drawing the boundaries of their domain. Therefore, Always analyze what type of intervention the VC prefers. Some VCs play a passive role where they do not directly become involved in the day to day running of a business. Others go above and beyond to offer passive help in business development unlike the preferred state. Go with an investor who’s in line.

Business Conditions

Your VC should be open to adjusting business conditions. Reacting to market changes or unforeseen situations such as the COVID-19 pandemic requires flexibility. Having a stubbed-downed VC that only wishes to meet your short term expectations may not be what your business is looking for.

Exit Strategy

Discuss any potential exit strategies in the beginning. Some VC’s have unreasonable short term expectancy which here as cited can easily go unfulfilled. It’s essential to discuss expectations that work best for a company’s progress rate.

Capital Liquidity and Fund Viability

Opt for a VC with the highest capital liquidity to enable smooth operations and funded growth of the company which may lead to expansion or gradual growth requiring much more capital investment. Everyone needs an investor with deep pockets who shall be able to reinvest as the business grows bigger.

Track Record

The venture capitalist and their team’s track record matters, and successful VCs have demonstrated experience in scaling and exiting businesses.

Successful and Unsuccessful Examples of Venture Capital Investments

A few examples are listed below to illustrate the effect of venture capital investment on a business’s success or failure:

Successful Investments

MakeMyTrip

Saif Partners invested $10 million in 2005 MakeMyTrip.

After some funding rounds, it IPO’d in 2010 with a valuation of $800 million.

Investors made five-to-six times their money within five years.

Justdial

Saif Partners also invested Rs. 50 crore into Justdial.

The company’s IPO was in 2013 and by 2014, Saif Partners sold their stake at a 30x return.

redBus

redBus raised $10 million from a number of investors including Inventus Capital.

Ibibo acquired the company in 2013 for $138 million, which was more than 25x the investment made.

Unsuccessful Investments

Doodhwala

Doodhwala raised $2.2 million, but failed, which resulted in a loss for the investors.

Doctalk

We were able to source $5 million from Matrix Partners, but Doctalk was ultimately shut down, illustrating the risks that come along with venture capital investments.

Conclusion

Even though it helps grow and scale businesses, venture capital financing certainly has its pros and cons from the perspective of the VCs, who deliberates on the details before investing, and the entrepreneurs who need to carefully evaluate the VC. But with sensible bridging from both sides, these investors can collaborately strategize with entrepreneurs to accomplish successful businesses with great expansion potential. If you are seeking investment or interested to invest, understanding these details earlier creates intelligent choices that foster fruitful outcomes.