from Company Founder.com 03/15 enhanced by Peter/CXO Wiz4biz
I get a lot of questions about what Venture Capital (VC) investors look for when they are considering investing in a venture. Many of the characteristics I’ll cover here are also applicable to what “Angel Investors” look for in prospective investments, as these days, a significant percentage of such investors have been at it a while and have reached a level of investing sophistication that is hard to differentiate from that of venture capitalists. In my experience and that of my client companies, the 11 venture characteristics discussed below usually play at least some role, and often a significant one, in the investment screening decisions of VC’s & more sophisticated Angel investors.
1. Strong Management Team. Pretty much every Investor I know will agree with the old saying, “I’d rather have an A team with a B idea than vice-versa”. The reason for this is that startup ventures and even those a little further along in their development rarely go exactly as planned. There is always “execution risk” in any venture, but the earlier the stage of the business – and the more cutting-edge the technology being exploited – the greater this risk becomes. In such situations, it is very helpful to have a team that has been around the block and has a track record of success of maneuvering in such dynamic environments.
2. A Growing, Sizable Market. The target market should be sizable & growing. Investors typically are not looking for “small” opportunities. They are looking for ventures that are targeting markets – which show promise of significant growth for at least five or ten years into the future and which are of a size ($1B+, minimum) – that will allow their prospective investment to enjoy considerable returns. So, if you are looking to corner the market on widgets in your small town, or if you are looking for working capital or even growth capital for your business in a mature, low-growth industry, don’t bother contacting Investors. The one nuance to this is if you are doing something to “revolutionize” a low-growth industry – in a segment that has reasonable size – you may then be able to stir up some interest. Also, clearly there are Investors that will look at opportunities in small, highly targeted segments, particularly for some very specialized technologies, but these are fewer & farther between.
3. Strong Margins – allow you to make a lot of mistakes and still be around to fight another day. They also allow the potential to make tremendous net profits & investor returns – if the company grows as planned. For these reasons, venture capitalists like to see high gross margins (60%+) in their prospective investments. It is widely known that business opportunities with such high gross margins are not easy to come by, so investors are willing to look at businesses that don’t quite reach that benchmark – particularly if there are other positive characteristics that make the venture attractive. Sometimes, for example, while strong gross margins would be a “nice to have,” it is much more important to the venture and the investor that the business achieve critical mass (for example, a large number of subscribers) quickly to become the leader in the market and attract the interest of potential acquirers. Every situation is unique, of course, but all else being equal, strong margins currently – or at least projected at some point in the future – raise the attractiveness of a potential investment.
4. Exit Potential. There are very few that want to be in an investment for “the long haul”. In fact, they typically raise their money from institutional investors and wealthy individuals, in order to invest it and obtain the best return they can in a certain period of time. They are what are called “closed end” funds. So there is an investment horizon and as managers with fiduciary responsibility to their investors for the money they have raised from them, investors do not have the luxury of not considering how they will exit from the investment. While the situation for Angel investors who are investing their own money is distinct from that of VCs investing money on the behalf of others, their “exit mentality” is usually similar. For these reasons, both investors will typically strongly consider how they’re likely going to be able to get out of a particular investment, before they will invest a dime.
5. Proprietary Technology. The focus on proprietary, patented (or patent-pending) technology will vary depending on which industry or industries the investor is focused on. Regardless of the industry, most all Investors – knowing how competitive any new market environment is – will want to see what many refer to as your “special sauce”. What is it that you do differently or have that’s unique, that will allow your venture to “excel” in the marketplace? The answers to this question can vary widely. They may relate to operational advantages, marketing strategies & tactics, or financial advantages you bring to the table. They may also come in the form of technology or business processes that you’ve patented, that will give you an advantage in the marketplace. Whatever they may be, you must show up to the table with some “special sauce” elements of your business, or you are not likely to get too far in obtaining investment.
Factors 6-11 in Premium Content.