May 9, 2014

Tagged Under: , , , , ,

Five Things Venture Capitalists Look For In Their Investments

Venture Capital is similar to how the music industry works. A record label wants to find artists with potential, a promising start, and a bright future. Likewise, a VC looks for a company that’s going to become the equivalent to: The Beatles, Michael Jackson, or Justin Timberlake. So what do venture capitalists look for in their next investment?

01. The Founder

A Founder is the biggest and the most important asset a startup has. The foremost question to ask is why did s/he decided to start the firm. Next, they’ll examine if the founder has a college degree in the related field, and how many years of experience they have in that industry. VCs are more inclined towards a seasoned entrepreneur as opposed to a rookie tech virtuoso with no track record. In the end, a VC wants to see a creative and driven leader who is highly knowledgeable and well-versed in their industry. VCs need to have trust in the artist (the founder), the management (the team) the album (the product), and their potential chart performance (the market). Another trait that VCs look for in a founder is perseverance or “grit”. Many studies and articles go so far as to say that a founder’s level of grit is more important than their IQ.

02. The Team

The biggest asset an entrepreneur has is the team. A team often compliments the founder and the business. Related to the quality of the founder is the quality of the team. A good team knows their market and is committed to stick to their vision; like a collective grit. A good team works effectively to produce innovative ideas or solutions to obstacles by making use of their diverse collection of skill sets. Every great musical group knows how to unite the individual skills of each band member to produce the highest quality product. Of course, like an upcoming band, a startup will most likely have deficiencies, besides money, like network, sales channel, hiring needs, PR and marketing, etc. The team (also in the form of other portfolio companies) can add value in the form of beneficial connections or aid in decision making.

03. Technology & Innovation

If founder is the heart of the company, technology is the lifeline that keeps it alive. VCs see hundred and sometimes thousands of companies every year, so innovation is the most elemental feature in the success of a startup. It’s simple but difficult; just think of an idea, or improvement to an idea, that nobody has thought of and then market it! Most startups are derivative of others, so when a good idea breaks, VCs will pay attention.

In 2010, Anthony Goldbloom founded Kaggle which established a massive community of data scientists who compete with each other to solve data science problems. Kaggle was appealing to VCs because it carved out a somewhat unexplored market. In a different way, another startup called Dwolla was appealing because it disrupted an existing market. Dwolla resembles a service like PayPal but it doesn’t use credit or debit cards. By going around those, they keep their fees low. Regardless of the size of the transaction, Dwolla takes only 25 cents. A similar service like Google Wallet allows a user to send money, though there’s a fee of 2.9% per transaction. Sometimes innovation is finding a new road or cutting a new path in a commonly traveled road.

04. Market

A venture capitalist is interested in an idea that will change a particular industry. In addition to that, they also look for companies with tremendous growth opportunity. VCs don’t just want to know how big of a market there is, or can be, for an idea, they also look for strategies on how to achieve that growth potential.

Ideally, a company should have defined their target market and acknowledged their place within it. Likewise, a company should have established goals and sensible means to get there. Investors are interested in momentum. This is found in a company’s current statistics such as: revenue, user numbers, or customer feedback, but VCs are also going to forecast growth assumption and inspect the quality of management. Momentum demands maintenance of a solid foundation.

05. Competition

The final facet VCs look at before investing is competition and barriers to entry. These barriers could be due to government regulations, high research and development cost, initial investment, or due to an over penetrated market. E.g., If your company provides a social networking service, it needs to compete and distinguish itself from Pinterest, Facebook, Google+, Twitter, Tumblr, Instagram, to name a few. A VC is most confident in funding something that is groundbreaking and disruptive when it comes to changing an industry. An investor’s ideal scenario would involve a technology that could be trademarked or patented. Once a market gets filled, like social networking, the difficulty to innovate skyrockets. There are an abundance of companies out there, but the venture capitalist wants to sift and sort for the most promising companies.


Post a Comment