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What Do Venture Capitalists Look for in a Growing Startup

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Venture capitalists (VCs) are vital when it comes to funding growing startup businesses. For VCs, it’s usually a slow process that requires lots of time and trust for them to find the right startups to invest in. But once they find a potential candidate for their investment, the rewards can be exponential. Finding the right candidate, however, is usually the most difficult part.

What is Venture Capital, Who are Venture Capitalists, and What Do They Do

In order to increase their wealth, investors invest their capital in businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists. They sometimes support growing startups that they deem to be a good investment for their portfolio.


The early stages of start-up businesses are tough, especially getting investors. Angel and venture capitalists are hard to find, and when you do find them, it will be even tougher to get them to invest. According to data compiled by Fundable, less than 1 percent of startups are funded by VCs. This means you really need to know what VCs look for in a growing startup.

Why Are Venture Capitalists so Picky With the Startups They Fund?

Startup entrepreneurs need to understand that Venture Capitalists take risks investing in growing startups. New ventures usually have little or few sales in the early growth stage, hence, they need heavy funding to start out. Startup founders also usually lack good management experiences and end up developing a shallow business plan. So what happens when venture capitalists invest in a company that doesn’t make it? Short answer: they lose their investment and this is why VCs are particular with their investment money.

Faced with these enormous risks, VCs still invested millions of Euros in startups. The real question is what prompts VCs to pull out their checkbooks? What are the most important things that a venture capitalist is looking for in a company to invest in?

In already established and well-funded companies, the process of creating value is straightforward. These companies produce sales, profits, and cash flow that can be used to get a reliable measure of value. For growing startups, VCs have to put a lot of effort into the business and the opportunity presented. 

What Type of Companies Do Venture Capitalists Invest In?

What Type of Companies Do VCs Invest In?

Venture capitalists put huge investments in new start-up companies. They hope to transform these companies to be a billion-euro company.

In an era of many investment opportunities and start-up pitches today. VCs often have a set of criteria that they look for and check before investing. These include amongst others;

  • The management team
  • Business concept and plan
  • Market opportunity
  • Risk Assessment etc.

5 Elements VCs Consider before Investing in a Growing Startup

1. Solid Management

Management is the most important factor that smart investors take into consideration. VCs invest in a management team and its ability to execute the business plan, first. They are not looking for successful managers. The interest is in executives who have built businesses that generated high returns.

Businesses looking for venture capital investment need to;

  • Be able to provide a list of well experienced and qualified teams.
  • Be willing to hire talented managers from the outside. 

There is an old saying that holds for many VCs. VCs prefer investing in a bad idea led by good management than a great business plan led by a team of amateurs.

2. Great Product Value with Competitive Edge

VCs want to invest in great products and services with long-lasting competitive edge. This motive will push them to find solutions to issues not addressed before. They look for products and services customers can’t do without in their daily lives.

Venture Capitalists always look for a competitive advantage in the market. They want their portfolio companies to be able to generate sales and profits before competitors come in. In business, less competition implies greater profit.

3. Market Size

The startup needs to show that the business will target a large market, hence, addressing market opportunity for grabbing VC investors’ attention. For VCs, the term “large” describes a market that can generate €1 billion or more in revenues. 

Bigger markets make investments even more exciting for investors because they look for potential ways to exit their investment once the profit hits. The business will have to grow fast enough for them to take first or second place in the market. 

Bigger market sizes also signify greater sales. This makes it even more exciting for VCs who have potential ways to exit their investment in profit although the business will have to grow fast enough for them to take first or second place in the market. VCs usually expect business plans to include detailed market size analysis. That is, market sizing should take the “top-down” and from the “bottom-up” approaches. These approaches involve providing 3rd party estimates from market research reports. Feedback from potential customers is an added advantage. This must show their willingness to buy and pay for the startup’s product.

4. Risks Assessment

As we have seen above, a VC’s job is based on taking risks. This implies they want to know what they are getting into when they take a stake in a growing startup. From the moment they talk to the business’s founders or read the business plan, they will want to be clear about what the business has accomplished, what it still needs to do, and the actual state of the business. This includes assessing the following;

  • Could regulatory or legal issues come up?
  • Is the market ready for the product or it’s a product for the future market?
  • Is there enough money available to meet the opportunity?
  • Is there an eventual exit from the investment and a chance to see a return before the exit?

These are the various ways by which VCs measure, test, and try to cut risks. This depends on the type of funding and the individuals making the investment decisions. Yet, they do this to mitigate risk while producing big returns from their investments.

5. Valuation Ask and Equity Structure

The valuation that the founders have in mind is important as it determines the stake the VCs fund will own. Besides, VCs will look into the existing equity holding and previous investment rounds.

To receive huge returns, VCs ensure that the portfolio company has a good chance of making sales. The only way for VCs to recover large investments is by making more returns. They ensure portfolio companies have a chance of making sales worth billions so a little risk turns into a handsome reward.

Fazit

What do venture capitalists look for in a growing startup?

The rewards of a successful, high-return investment are not always the case when VCs invest. Sometimes, seemingly profitable funding can turn into money-losing investments. So, before investing, VCs spend a lot of time analyzing these key elements. 

Venture capitalists want to know if the management is up to the task, whether the market size and product have what it takes to make the kind of money they aim for, and, moreover, minimizing risks is part of their job.

So what do venture capitalists look for in a growing startup? They look for groups like us! We are a group of dedicated developers, have an experienced track record, and VCs love working with us. If you are a growing startup in need of solid management, structured workflow, and/or a battle-proven process to give your product the competitive edge it needs, we can help! If you are ready to start your product development today, send us a message, and we will get back to you!

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