Angel investors and venture capitalist investors are early-stage investors who often provide funds to entrepreneurs trying to raise capital for their start-up businesses. Previously, Anand Jayapalan had spoken about how the venture capitalists (VCs) take on a serious risk while doing so. After all, many new startups have little to no sales, and their founders can severely lack real-life management experience. Hence, VCs are usually tight with their investment dollars and focus on a few important aspects when searching for companies to invest in.

Here are a few major considerations for a VC when evaluating a potential investment:

  • Solid management: Management is among the most critical factors that investors have to take into account. Venture Capitalists tend to invest in the management team of a company and their ability to execute the business plan. These investors do not look for “green” managers. Rather, they try to find executives who have built successful businesses generating good returns for the investors. Startup founders searching for VC investments must provide a list of qualified and experienced people in their team, who would play vital roles in the development of the company. If the business does not have such managers, they must be willing to hire them from outside.
  • Size of the market: To grab the attention of the venture capitalists, it is vital to demonstrate that the startup shall target a large, addressable market opportunity. To receive the high returns that they expect from investments, VCs typically try to make sure that their portfolio firms have a good chance of growing sales worth several millions of dollars. The bigger the market size, the greater shall be the likelihood of a trade sale, and hence increase the odds of a VC investing in the business. VC investors expect business plans to include detailed market size analysis, which is presented from the “top down” and from the “bottom up.”
  • Good product with a competitive edge: Venture Capitalists typically invest in businesses offering good products and services that have a distinctive competitive edge. They look for services and products that the customers would actually want to avail, as it is better or more affordable than the competitors in the market. Venture Capitalists want to make sure that their portfolio companies have the capacity to generate sales and profits, and surpass the market competitors. In fact, the fewer direct competitors operating in the space, the better.

Earlier, Anand Jayapalan had spoken about how the job of VCs is to take on risks, and hence they would want to know exactly what they are getting into when they take a stake in an early stage company. As venture capitalists speak with the founders of a startup or read their business plan, they would want to gain absolute clarity about what the business has accomplished and what still needs to be accomplished. The goal of VCs is to mitigate risk while producing big returns from their investments. The potential gains from a highly successful, lucrative investment can be offset by losses from unsuccessful ones. Therefore, venture capitalists invest significant time in evaluating opportunities, and searching for crucial factors that contribute to success.