Venture capitalists constantly make decisions about whether to put money into various start-ups. This process typically involves evaluating a variety of factors to assess the potential risks and rewards of an investment. For start-ups, it is challenging to meet investors but even harder to persuade them to invest money. Here are three key pillars that inform their decision: team, product, and market.
Right people can turn any idea into a business. That is why investors always pay attention to a core team. Data shows that 60% of new ventures fail due to problems with the team. Investors need to have confidence that the team has the necessary skills, knowledge, experience and understanding of how to achieve success.
The ideal team should strike a perfect balance between team member experience (hard skills) and passion and vision (soft skills).
Investors want to invest in a product with great potential and a competitive edge. The product should provide a solution to a burning problem that nobody solved before and be difficult to duplicate (the company must have a strong Intellectual Property strategy).
Investors look for products and services that customers will desperately need because it’s so much better or cheaper than anything else on the market. VCs look for a competitive advantage that is very difficult to replicate.
VCs don’t just invest in people or ideas. More importantly, they invest in industries. One of the difficulties is to predict which market is worthy. Investors try to avoid the technologies which are uncertain and whose market needs are unknown, as well as the later stages when growth rates dramatically decrease. In other words, even if your team or product is excellent but the market which you are targeting is outdated or does not yet exist it takes much more effort to raise the investment. It helps if the total target available market (TAM) estimation sits above £1bn in revenue potential. Most investors look for businesses that are scalable. Venture capitalists expect detailed market size analysis including market research reports, third-party estimations, and feedback from potential customers.
Other key factors include:
1. The business model: VCs will evaluate the startup's business model to determine whether it is financially viable and scalable. They will assess the startup's revenue streams, customer acquisition costs, and operating costs to determine whether the business is on a path to profitability.
2. The stage of the company: VCs will consider the stage of the startup when deciding whether to invest. Early stage startups are typically riskier investments, but they also have the potential for greater returns if they are successful. Later stage startups are generally less risky, but may offer lower returns. VCs will assess the stage of the startup to determine the level of risk and potential return on their investment.
3. The potential return on investment: VCs will consider the potential return on their investment and whether it is worth the risk. They will assess the potential size of the market, the competitive landscape, and the company's growth potential to determine the potential return on their investment.
Overall, VCs are looking for startups that have the potential to be successful and provide a strong return on investment. They will evaluate a variety of factors to determine whether a startup meets these criteria.