Inside the VC's eyes – Few basic issues to entrepreneurs being aware and other things to think about when seeking funding

For entrepreneurs looking to raise capital for their startups, venture capitalist investors can be hard to find, and even tougher to get investments out of them. When entrepreneurs are in the situation of seeking funding, they put their personal vision (Viktor Frankl, psychologist) in check and often, if they don’t get the desired results, a negative cycle can arise inside the startup and make life very difficult for everyone involved. At this point, have a great methodology and really understand how VCs operate can make a tremendous difference.

So what are the basic issues that entrepreneurs need to be aware when the time comes to start looking for investors? Three main basic pillars sustain VCs investments: People, Product and Context (PPC).

• People

When looking at a team, venture capitalists hope to see different skills that can contribute to the overall success of the company. It’s not so much about the idea as it is about the ability of those working on the idea – whatever it may be. However, it is not just about technical skills, VCs want to see a cohesive, engaged and passionate team in action. The team should be composed of people who understand why they are there and what they contribute – they must have a purpose.

Even an amazing idea, it won’t take off without the proper execution (on the other hand, a mediocre idea has the potential to succeed with a competent management team determined to make it works). Moreover, the execution skills and capabilities of the management team are a key factor when VCs are analyzing startup. Execution is king!

Another key factor is the character of the people. Honesty, ethic and transparency are fundamental to build and manage tong-term relationships with investors and VCs really care about managing their relationships with the portfolio companies.

The VCs will also put a lot of value on the CEO. They will invest efforts into understanding how the CEO operates – how he or she deals with issues, motivates and listens, and inspires and drives the business forward.

Finally, and this is a big one, VCs must see evidence that the team is flexible enough to adapt. The ability to pivot is one of the most vital traits in any business and there aren’t too many successful organizations that end up the way they started.

• Product

A unique product or service will be attractive to VCs. A product that is not somehow different – that becomes a commodity – will not attract. However, ‘unique’ means not only different and new, but also hard for a competitor to replicate. The product needs to include a ‘secret sauce’ that will prevent a competitor from taking it easily out. There are several ways to stand out: product differentiation, process differentiation, super niche differentiation and, price point differentiation. More differentiators the product have, better.

On other words, VCs look for a competitive advantage in the market. They want their portfolio companies to be able to generate sales (and maybe profits) before competitors enter on the market – the VCs will always have their exit strategies on mind and a competitive advantage have a high value when they are selling their investments.

Have an interesting business model can help here. A startup with strategies and processes that will make the company's costs drop and value to the customer rise as it grows takes the attention.

• Context

Demonstrating that the business will target a large and addressable market opportunity is important for grabbing VC investors' attention. In order to receive the large returns that they expect from investments, VCs generally want to ensure that their portfolio companies have a chance of growing sales worth hundreds of millions.

VCs expect business plans to include detailed market size analysis. Market sizing should be presented from the "top down" and from the "bottom up" perspectives. That means providing third-party estimates found in market research reports, but also feedbacks from customers and potential customers, showing their willingness to buy and pay for the startup's product.

However, “context” is more embracing than “market”. It is important to VCs understand the ecosystem that the startup is in. It will affect the capability of the company hire talents, bring new ideas, be at the edge of innovation and pivot when needed. The ecosystem can help or difficult the growth of the startup. Fiscal questions, legal hitches, infrastructural problems can be issues that difficult the life of the startup and, as consequence, the investment’s returns.

Understand the startup and what to looking for

There are plenty of good reasons why VCs are tight with their millions. What is needed to be understand is that VCs are taking on serious risk. New ventures frequently have little to no sales, the founders may have only the faintest real-life management experience, and the business plan may be based on nothing more than a concept or a simple prototype.

entrepreneurs must know that the marriage between startups and VCs is not necessarily a fast track to success

The main takeaway from this text is that each investor has a different perspective on what a startup needs to raise capital but is possible identify few basic patterns (PPC). In addition, what VCs look for won’t be the same for every industry and each fund has its own strategy. It is vital to entrepreneurs understand what kind of partners fit better to their startups at that moment and in the close future. Once it is clear, entrepreneurs must know that the marriage between startups and VCs is not necessarily a fast track to success.

Some extra points to think about:

The journey is better done with a great team: entrepreneurs should not fall into the trap of thinking it is possible to do it all alone – rarely a valuable company can be built without a right team.

Think a lot about business model: VCs will invest here if the startup has a large base of paying customers, kept them buying over time, added new customers, and is boosting selling efficiency as the company grows.

Risks related to investments from a VC perspective: the ways that VCs measure, evaluate and try to minimize risk can vary depending on the type of fund and the individuals who are making the investment decisions but few issues should be very clear for entrepreneurs before looking for investors: could regulatory or legal issues pop up? Is there enough money in the fund to fully meet the opportunity? Is there an eventual exit from the investment and a chance to see a return? Is this the right product for today or 10 years from today?

The stage of the company: seed and early stage companies are riskier than later stage companies who in some way have proven they can make a profit or develop great operations. VCs make far more deals in seed-stage companies but, on average, risk less capital. To make efficient investment’s processes it is important for entrepreneurs to have a clear idea of what stage the startup is and what is needed to grow at that stage.

Transparency on how the invested money will be spent: it sounds self-evident, but it really needs to be spelled out. VC investors need to know – in some detail – how the startup management intends to use their money. Will the startup invest in advertising? Will they hire new talents, either top executives or new sales staffs? Will the startup use the funds to invest in physical structure? The investor needs to know what the startup plans to do with the money, and how these investments mesh with their goals.

Back up with metrics and solid evidences: a VC will take the time to get to know a startup before investing. Every detail, every information that was given by the startup will be tacked in consideration and analyzed. And if the data falls short, the next time their analyst calls, they will ask why. So it is important to have solid evidences and solid backups – the startup must have metrics and structured data about analyses done and projections made.