Preparation for Venture Capital Funding

Venture capital stage: Once a company has a product and is ready to enter the market in a big way, venture capital financing provides the capital for product expansion and/or market expansion.   Sometimes this round of funding is referred to as Series A round.  Typically the goal of the investor at this stage is a 7 times return on their investment particularly through an event such as an IPO or trade sale of the company.

A short checklist that a venture capitalists will want to see:

Market leadership potential: the VC will want to see a product or service that is not easily replicable, that can defend market space against challengers and will show a predictable revenue growth.  Many VCs look for a hockey stick effect being that revenue growth will start to far exceed expenses.

Market Characteristics: Venture Capitalists will also consider the characteristics of the market itself.  They will avoid “me too” products or products that couldn’t withstand a substantial entry by an entrenched competitor.   The market should be in its early stages – not too early and characterized by early adopter not a latent stage market.  VCs want to see products in a market that has significant growth potential the opportunity for the organization to become a leader in its space.

Management Team: Many advisors that the management team is more important that the product or service.  The management team needs to have experts at leading the various functions of the organization.   Most of the executives need to have” blue ribbon” company experience along with a substantial portion of start-up experience.  Starting a company requires the skills to roll up the sleeves to get product out the door and the ability to build a solid infrastructure for future employees to adapt to.  The VC will want to see that the leadership team has vision, expertise, and the ability to propel a business to a significant level of growth.

Competitive Advantage: A Venture Capitalist will want the market to protect his investment so competitive advantage is very important.  An easy “me too” product by an established company could end the life of a young company.   A VC would prefer a solution that has a lot of science behind it, for example.  A VC would prefer a product that is the combination of two fields that don’t naturally work together such as a social media site for astronomy professors or the like.  The more barriers that protect the investment will improve the changes of a VC investing in a particular company.