Business

How Do Venture Capitalists Make Decisions?

How Do Venture Capitalists Make Decisions?

For up-and-coming tech companies, one of the biggest hurdles to growth is money. You can have a great idea with all the talent in the world, but you’ll come to a grinding halt without funds. But how do you raise the funds?

If you have the kind of business they’re looking for, venture capitalists like Carter Reum may be the solution to your problems. Venture capitalists inject money into a struggling startup in exchange for equity. They use their equity to guide the business to success and exit with a profit when the business is acquired or goes public. The business succeeds where it otherwise may have failed, and the venture capitalist reaps the rewards of their investment.

If this sounds like a magical solution, keep in mind that you’re just one of many startups seeking that golden ticket to success. Less than 1% of startups will receive venture capital funding, and 65% of those go on to fail regardless. For that reason, venture capitalists need to be very selective.

If you’re the founder of a startup and you’re wondering how you can stand out from your competition, it may help to take a look at how venture capitalists make decisions. Knowing what someone like Carter Reum looks for can give you that competitive edge.

What Do Venture Capitalists Look For?

Because Carter Reum and other venture capitalists prefer to get in on the ground floor, they’re not looking for a fat balance sheet. They don’t expect to see one at that stage. What venture capitalists look for is potential. Let’s take a look at the XXX top considerations for venture capitalist decision-making.                                                                                                                                                                                                                                                        

  1. Quality Founders

It all starts with the people at the top: the founders. A venture capitalist will be looking at how committed, knowledgeable, and passionate they are. They look for adaptable, coachable founders who can keep cool under pressure. Lastly, a founder must be an excellent communicator and inspire trust and enthusiasm.

     2. Quality Team

Your team needs to be in place by the time Carter Reum or another venture capitalist steps in. The dedication of a team is measured by how committed they are during the bootstrapping stage; a team is only as strong as its weakest link. Your team should have the core skills needed to make the business succeed. A forward-thinking founder will plan ahead for how a venture capitalist will perceive their team.

   3. Cutting-Edge Product

Venture capitalists look for new, proprietary technologies or a market niche that the company can quickly dominate. If a customer can get the same basic thing from a competitor, a venture capitalist will quickly lose interest. An innovative, unique product that shakes things up or quickly overcomes weaker competitors is preferable.

  4. Traction

Your startup will need momentum and a clear indication of how quickly your business is likely to grow. Having a great idea isn’t enough… there has to be a market for it, and a core demographic large enough to support the business’s growth. This is all part of forecasting if the business is going to be viable after the venture capitalist gets involved.  If your business is moving in fits and starts, you’ll probably get passed over.

  5. Conversion

Without customers to pay for your product or service, you won’t have a business. It isn’t enough to get lots of looks or “maybes.” There has to be a plan in place to find customers and get them to convert into buyers. The more barriers there are to purchasing, the harder it will be to convert them. The simpler the plan, the better.

  6. Cash Burn Rate

Venture capitalists like Carter Reum will want to know how fast you go through cash. In general, your cash burn rate is your total monthly revenue minus operating costs and cost of goods sold, if any. It’s not uncommon for a startup to spend a lot of cash on growth, especially if there is no revenue yet. The more you’re responsible with the cash you have, the better you’ll look to a venture capitalist.

  7. Financial Plan

Nobody’s going to pump your business full of cash without knowing what it’s all going towards. Using current trends and well-thought-out predictions, you’ll want a financial forecast that includes how your cash flow, operating costs, and revenues will be impacted. This will help give a venture capitalist reassurance that their investment will be used wisely.

  8. High Returns

Given how many venture capital-funded businesses still fail, venture capitalists look for a 10x return on their investment. This makes it worth their effort and offsets their losses from other investments so they can continue to have money to invest.

The Bottom Line

All other things being equal, a venture capitalist will look for a startup that fits their investment philosophy. Not all businesses will… but maybe yours will succeed.



Business

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