The most frustrating moment for every founder is reading that email response from a potential investor written, “unfortunately we cannot proceed with the opportunity”. These responses have become increasingly common, indicating that the VC investment market is evolving.
With the recent Global economic slump, investors have taken a more cautious stance towards investments and seem less keen to close deals based only on a pitch deck, or hype or the fear of missing out. Investors’ due diligence seems to have upped a notch and resultantly more opportunities are being turned down. Does this mean that investors are not investing anymore? Not at all, many entrepreneurs with solid business models continue to receive funding.
Here are some of the key considerations in the eye of a VC:
Does the opportunity fit the investment mandate:
VCs, like any business, are directed by a mandate that outlines the types of opportunities that they invest in. The opportunity should be in line with the VC’s investment mandate.
How will value be created:
The baseline of a successful business is offering a unique solution that addresses a genuine and day-to-day problem. There are some excellent innovations and advances out there that have little to no market. The question lies, how big is the market for your product and who absolutely needs to have it?
What is the team’s expertise:
Typically, VCs invest in a management team and its ability to execute the business plan. There is more inclined towards a team which has developed successful businesses that have delivered substantial returns for investors. This does not necessarily have to be the founders themselves but can be their advisors, tech team and other senior management who play a pivotal role in the running of the business.
Product’s growth potential:
VCs are inclined towards opportunities with a rapid growth potential and thereby yielding higher exit multiples and higher returns. Among competing opportunities presented, a VC would select the one which gives a higher exit multiple.
Product relevance in the future:
In assessing the product market fit, VCs often ask, is this the right product for today or 10 years from today? VCs are looking for long-term value creation and growth in their portfolio companies.
How competitive advantage will be maintained:
Barriers to entry deter competition and allow room for the company to grow and realize gains. IP protected/ patented technologies are the first preferential barriers to entry followed by other forms of barriers such as government contracts/decrees, exclusive contracts with suppliers and customers, etc.
Barriers to entry do not necessarily mean there are no competitors since the presence of a rival might serve as proof of concept. On the other hand, too much rivalry hinders the company's growth, and VCs are unlikely to enter a crowded industry.
Once the founder has successfully built his/her business around all the above points, then the chances to secure funds are increased.