According to research done by the U.S. Bureau of Labor Statistics, nearly 60% of new businesses shut down within the first four years of operation. With these slim chances, it seems even more impossible to get funded. But don’t run off to the corporate world yet, entrepreneurs. Instead, check out the top four things venture capitalists look for when selecting a startup to fund:
- A Coachable and Passionate Management Team
When venture capitalists set out to invest in new projects, they first examine the brains behind it all. Whether your business is run by an individual, a partnership or small management team, the VC wants to be confident that the business is built on a solid foundation. Venture capitalists look for management teams that are goal-oriented and coachable. If the management team is not willing to learn from the VC, the collaboration needed to grow the business is difficult, if not impossible, to establish.
Two important characteristics that entrepreneurs need to be successful are resiliency and emotional intelligence. Resilient entrepreneurs exhibit passion and are the driving force behind the business and its employees. Entrepreneurs who have emotional intelligence also have the intuition to know when to pack up and move on to the next, more viable idea. Great entrepreneurs understand that making mistakes is part of the job description. Venture capitalists value entrepreneurs who can learn from failure and can use it as a motivator.
- Realistic Business Plans and Expectations
An entrepreneur must write a clear and concise business plan that defines what product and/or service their business offers. Although a long, detailed strategy is not always necessary, a solid written plan assures investors that the entrepreneur has calculated the potential opportunities, risks and competitors in the marketplace. Having the official business name, description, competitive analysis and goals clearly outlined in the business plan will be helpful in the long run.
More often than not, startups take twice as long to get off the ground and cost twice as much as the founders expect. Clear predictions and correct expense calculations are crucial for establishing a business’ credibility to potential VC’s. For more information on what (and what not) to include in your business plan to attract the right VC, see 5 Business Plan Mistakes that Send Investors Packing.
- Ability to Problem Solve and Scalability
Venture capitalists look for businesses that have long-term viability. Successful startups must be scalable in nature (in other words, they must possess the ability to grow and perform with consistent quality). Venture capitalists look for businesses that solve problems that are financially worth solving. The idea is not relevant, or financially viable, if there is not a sizeable, addressable market that cares about the problem the business is trying to solve. The business needs to provide a service that people are willing to take action on, right now.
At the same time, it isn’t just the idea that is important. In fact, the process could possibly be the most critical for a startup. Herb Sih, startup consultant and co-founder of Think Big Partners, advises that “entrepreneurs seeking to gain funding from a venture capitalist should remember not to fall in love with their idea, but instead fall in love with the idea of solving their problem.”
Business success is not always measured by an end result, but how the leaders react to the obstacles along the way. The ability for an entrepreneur to rebound after failure is an indicator that he or she will be successful in the future.
- Mutually Beneficial Relationship
Venture capitalists are not all the same. At the end of the day, the business in question should fit into the VC’s overall portfolio and the relationship should make sense for both parties. But how can entrepreneurs connect with venture capitalists in the first place? To many, they seem extremely difficult to find.
There are a handful of guidelines about what not to do when approaching investors. One of the worst ways to attract venture capitalists is by unsolicited email. Many times, this demonstrates that the entrepreneur has not done the appropriate research. If you have a particular VC in mind, find a way to get connected through professional acquaintances or at networking events. Use professional social media platforms like LinkedIn to stay connected after the initial meeting and attempt to develop a professional relationship through social media. And always keep in mind that whether the benefit is high margins, proprietary, patented technology or a different advantage, a VC ultimately cares about their return on investment - and how soon they will get it.
Securing adequate funding can be stressful and time consuming. If you focus on these four tips while planting your small business seed, you will reap the rewards of a credible VC and valuable capital!