The Top 5 Points A Venture Capitalist Wants To Hear

There was a whole lot to be learned here, but the biggest take-away from the whole thing was a list of the top five things venture capitalists look for in a desirable investment. As an entrepreneur you should be hitting every point in your planning even if you don't intend to seek venture capital, as these are key criteria for an idea that has strong chances of success. Here they are in no particular order:

1) Exit Strategy

This is the number one point actually and the presenters emphasized it very heavily. You absolutely must know how you will cash out and get the big upside from building the business. Venture capitalists and angels are looking for approximately a 10x return in 5 years on their money, so your venture must be able to provide this. A popular exit strategy is being bought-out by a massive competitor or partner, such as the Web 2.0 companies who have been or are hoping to be aquired by a giant like Google. Other strategies like going public or simply liquidating the business exist, but remember that ultimately your exit strategy has to have data and some realistic thinking behind it.

2) Entry Barriers

A great idea is a start, but you need to be able to show that you can stay in the game after the cat is out of the bag. Who will your competitors be? What protects you from a much larger company entering the market with their own product and wiping you out? The stronger your entry barriers the more of the market you can reasonably expect to claim and the greater the chance your company will be around long enough to get that upside.

This was a really interesting one to look at when the people who volunteered to pitch their ideas presented. Patents came up a couple times, as well as some strong legislation banning an existing product. My favorite response came from a really cool laser technology start-up. Someone had asked about the risk of another researcher coming up with a similiar technique tomorrow. These two folks pointed out that their product required high expertise in a number of complex fields, and that very little research was being done in the area worldwide. Furthermore their prototype already worked and the venture was ready to build a fullscale machine as soon as they received funding. This placed statistics and time on their side.

3)What is Product/Service Similiar to?

This was a point I had never really heard before in terms of what VCs are looking for, but it makes a lot of sense. Your proposed business should have similiar ideas out there, or be a combination of similiar ideas. This provides a reference point for the potential investor and allows you to show a proven market.

If you have a really novel idea you can certainly still get funding, but this uniqueness can actually work against you.

4) Existing Revenue

The general rule presented was that angel investors don't require revenue to be present, but venture capitalists usually do. This ties back to a mistake that entrepreneurs often make - seeking out venture capital funding too early. It's not all about making the VC happy either. By having real revenue coming in at the time of investment you will also protect more of your equity in the business. This is very important as your VC will end up owning most of the company.

5) How Much Money Do You Need? For What?

You not only need to know that you need money, you need to know how much and how you will spend. The VC will be looking for realistic estimates that show you have a real idea of how much your product will cost to bring to market. Don't forget the operating expenses, marketing, and legal fees that will accompany your venture. One very good pitcher suggested that she and her partners will work for free until the product is selling. The presenter immediately pointed out that an investor would much rather put a few extra hundred thousand into a multi-million dollar investment and have you concentrating on it fulltime rather than working elsewhere too. So include a salary for yourself!

Another very interesting point was brought up here too - venture capitalists like to hear large numbers (not necessarily true with angels). A VC is obligated to invest a certain incredibly large figure in a very short period of time, and larger investments mean this can be done sooner. If your company puts $20 million to good use, that's 4 $5 million start-ups that don't have to be found.

Conclusions

I'm glad I attended this talk and I hope my recap conveys some of the very important information covered. It's always important to understand where the other side is coming from in business, and in this case real investors were explaining what really matters. None of the presenters hit all five points completely even though some of these were ideas that had already been highly successful pitches in new venture competitions. It's easy to miss important details and the best way to be prepared is to hit this criteria long before you are seeking funding.

Big thanks to Infusion Angels for putting this event on. They are a Waterloo, Ontario company located at the University of Waterloo's new Accelerator Centre. Give them a shout if you need funding for an idea.

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