What it takes to raise Venture Capital

I am often asked what VC look for when making their investment decisions and while I truly believe that it is at least 80% “art” and only 20% “science” I thought I’d quickly share 3 main, objective criteria (which then require subjective analysis) with the hope that it helps you assess how you stack up relative to what we VCs are looking for.  No, this isn’t a repeat of my “3Ps” post from a few years ago.

1. Team - A great team is paramount.  That said, it doesn’t necessarily mean that your team has to be complete when you raise money.  It actually varies by fund and firm as to how complete your team needs to be before they are interested.  So, what are the elements of a great team?  Easy.  Great team members that compliment each other.  So, what do VC’s consider “great” in terms of entrepreneurs?  Again, the answer varies by VC but most generally agree and are looking for evidence (empirical and anecdotal) of a high intellect, integrity, energy & passion, deep subject matter expertise, vision, and persistence & fortitude.  I could spend separate blog posts on each aspect but won’t spend the time unless there is an overwhelming request to do so.

2. A solid business model - VC are looking to invest in companies that have a robust, competitive advantage that provides protection from imitation, protection from supplier/customer holdups, protection from substitution and protection from complacency.  Each of these aspects arguably merit separate posts so let me know if you’d like me to go deeper and, if so, on which point(s).    VCs area also looking for companies whose business models are self-reinforcing wherein the company is able to expand without conflicting its model and, ideally, achieve some type of economy of scale.  Finally, a company’s model should align with the company’s management’s goals as well as those of the prospective VC.  We are not looking to invest in “lifestyle” businesses.

3. Targeting the right market - Notice I did not just say “large” when mentioning targeted markets.  Sure, most VCs prefer extremely large markets that are rapidly growing (myself included) but this third criteria seems to be the most subjective of the three I’ve listed for one simple reason.  The equation we are really solving for here is simply is the target market “right” such that I can invest the amount of money I need/want to invest into this company and have the investment return a large multiple on that investment in a set amount of time (< 10 yrs.).  Another way to look at this is that the size of the market is relative to the size of the company the entrepreneur aspires to and relative to the fund he or she is pitching.

Let me know if you’d like elaboration on any of these points.  I’m finding myself with less and less time to write these days but I have an active bin list and will continue to try and find time to write.