Venture capital funds (VCs) play a key role in the investment world. There are many startups looking for funds, and VCs must choose the right ones to succeed.
Here are the five most important elements analyzed by VCs every time they decide to invest in a startup or SME
1. THE TEAM
The team is the most important parameter for any investor, both early stage and series A. Who are the people who work in this company? Who are the founders? Have they been successful in the past? VC decisions are based in part on the team’s experience and success.
Venture capitalists spend time with the founders and the team before investing. Even if they don’t invest, it’s not time wasted: startups and VCs learn many things during this comparison. VCs want to understand the skills of the founders and important team members. For example, if the startup works in the deeptech sector, potential investors try to understand if the CTO has the necessary skills to carry the project forward.
2. THE MARKETPLACE
There are many startups in the world that have revolutionary ideas, but unfortunately they are ahead of their time, or there is not yet a suitable market for the product. An investor must analyze the size of the market available for the product or service offered. If demand does not exist, or if there are already many similar companies in the market, VCs do not invest in that sector.
Market analysis is an essential step for venture capital funds – if there is not a large potential market it will be difficult to recover the money invested. Startups need to do extensive research before they present themselves to investors.
VC funds want to know who are the main competitors of the startup looking for investments. There are always competitors in any sector, even for the most innovative projects, and for founders and investors it is important to understand who they are and what they do.
VCs look for all the competitors of a startup to see which is the leading company in the industry – it makes no sense to invest in one company if there is already another that will be more successful.
4. RETURN ON INVESTMENT
The purpose of VC funds is to obtain a return on investment (ROI). VCs analyze the business plan of the startup and check all the forecasts to see if they are realistic and achievable. For startups, it is essential to present all financial data in an honest, accurate and clear way.
Numbers are important to VCs. They want to know how many users there are, the number of products sold, turnover, and revenue stream. Plus, they need proof. For ‘early stage’ companies looking for capital, it can be difficult to provide information like this: maybe they only have a prototype or no revenue yet.