PERKSTART News & Views: What Venture Capitalists look for when funding Start-Ups

Venture capitalists are individuals and companies who invest a large sum of cash in exchange for equity in a business that they think would give a significantly high return – at least 20 percent - for their money in the shortest possible time. It would just make sense for them to take control over major decision-making responsibilities because of their high stake in the business.

But for the first-time entrepreneur, however, giving up a lot of equity may not be a good strategy especially if he or she wants to maintain control over the company’s direction and ownership. On the other hand, if this venture capitalist would bring in strategic connections that will accelerate business growth remarkably faster than usual, it is definitely the opportunity that any aspiring entrepreneur is looking for.

Unfortunately, not too many of these investors are eager to jump in and gamble with their funds just because the business idea sounds very promising. There must be a very compelling innovative twist or a brilliant solution to a persistently annoying problem. In fact, they have very stringent criteria for choosing which start-up business to invest in. These are the three critical success factors they look at:

PRODUCT. Your product must be so unique that no similar product is already in the market. You must be the first one to have thought about it, created it and started building proof of concept or strong evidence that it is working. This means that you have done your due diligence and you can actually deliver the expected result. In other words, the start-up business must come up with a solution that will radically change the way we do business or solve problems in our daily lives. For these shark investors, as they are appropriately called, investing in a start-up company that will only sell another product that competes with an existing one would be a total waste of their most sought after resource – large capital infusion.

PEOPLE. Are you the right person to do this? Do you have the expertise which can vouch for your credibility in creating and scaling up this business? If not, it will be necessary to get a partner who should be able to get the respect and approval of the prospective investors. This expert should have verifiable track record of success in the field or industry your business will be operating in. With so many other start-ups aiming to get the same strategic partner or capital fund, you must be able to show your value also to these prospective investors why they should do business with you and not with someone else.

PROCESS. You must be confident enough that your process cannot be easily copied and duplicated. It should be very difficult to figure out that you must have already gained substantial market share before somebody else comes up with a similar product. Your proprietary process reflects your core competence which will keep you in business as long as you know when and how to dynamically utilize it to your competitive advantage.

Before you make your pitch to one of these shark investors, make sure you have your ducks in a row because they will surely rip your presentation apart to reveal your flaws and weaknesses. Be ready to show evidence for all your claims especially your sales numbers. Remember that it’s always about their bottom line.

(By ROWENA PEŇALBA, Executive Director of PerkStart)