Venture capitalists (VCs) evaluate startups in a lot of different ways because they are always trying to find a good investment and how to actually define a “good investment” will vary depending on which VC you talk to. So, generally the process starts with scouting and combing through a large pool of startups. A VC firm will have some scouts and analysts that will go looking for potential investments and can find them through their own research or referrals. Then, they will gather information on these potential investments and start to evaluate and narrow down the list.
When it comes to the actual evaluation, there are a lot of factors that will be looked at and VCs will vary on which factors are the most important to them individually. In general, though, they are looking for a return on their investment so naturally they are looking for signs that point to a likely return on their investment.
Obviously, you need to show them that you can make money so that you can pay them their money back. For that reason, VCs will be more likely to invest in your startup if it is already making a profit. But, a speculative profit could be enough in some situations. They also want to see how you plan to grow your profits in the future so your business plan should explain how you plan to grow.
Taking on seed or other types of smaller level funding at an early stage can signal to VCs that other people have confidence in your startup and that you are ready to take on more funding. So, before seeking VC funding it would help to try to raise capital in other ways to show that your startup can take on investments and provide a return for investors.
Other factors are important, too and it is hard to say exactly which one is the most important. A VC is looking for an investment opportunity that stands out above the rest, so your best bet to find VC funding is to stand out as a better investment opportunity than other startups that the VC is seeing [more on thatfrom Jason Lemkin]. An attorney can help you with this part.
An experienced attorney will have relationships with VCs and will know what VCs in the area are looking for and how to show them what they want to see. An attorney can really help a startup through the VC process by being a link between the two. If you still have questions or want to chat about your startup, visitwhere we will match you with an experienced startup attorney for a free consultation.