What are VC looking for in an early-stage startup?

QUESTION:

I’m trying to raise money for my startup, and I was wondering what VC are looking for in an early-stage startup.

ANSWER:

Naomi Kokubo

Naomi Kokubo

by Naomi Kokubo, Cofounder of Founders Space

It’s hard enough to catch a venture capital company’s eye, but convincing them to give you money is even harder. Here are a few tips my partner and I learned after raising funds for three different startups:

1)  VC want to see a viable team with strong leadership.  The team is the most important part.  They know you’ll hit numerous roadblocks, but if the team is excellent, you should be able to navigate around them and come out successful.

2)  VC want to invest in a huge market.  VCs are NOT interested in a $10 million dollar exit.  The market has to be big enough to sustain at least a $500 million exit, and hopefully a multi-billion dollar one.  You need to be addressing a large enough market to support a high-value acquisition or possibly an IPO.

3) Your valuation expectations can’t be totally out of line with the market.  If they can invest in one of your competitors at half the valuation, why should they invest in you and pay double?

4)  You need to convey a passion for what you’re doing and demonstrate that you’ve got skin in the game.  VC don’t want someone who’s looking for a cushy job.  They want a true entrepreneur who has invested his/her own money/time and is determined to make this a success or die trying.   This demonstrates that you truly believe in what you’re doing and won’t stop until you see it through.

5)  VCs want to invest in businesses that have some unique advantage, whether it’s patented IP, trade secrets or team members with unique abilities and knowledge that no one else can easily replicate.  They always ask what are the barriers to entry.   Sometimes these can be as simple as momentum in the market.  If you’re Twitter, you don’t need patents or trade secrets, you own the brand Twitter.   But most entrepreneurs are not lucky enough to be in that position, so you’d better have a good answer.

6)  Last, but certainly not least, is traction.  This is actually mandatory in today’s world.  You used to be able to get funded off a business plan, but in the current market, you need to show your business is taking off.   If you can’t show exceptional growth in terms of users and/or revenue, then 99% of the VC won’t even consider funding you.  You’ll have to stick with friends, family and angels (if you’re lucky).

Those are the top things that VC look for.   Of course, there are more, but this should get you started.

Comments & Advice:
  1. […] What kind of advantage will this create vs. our competitors?  Barriers to entry? […]

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