When Do VCs Invest?

If you are a second time entrepreneur or a serial entrepreneur (having founded and exited start-ups, I would say, more than twice) you would very well know that it is not advisable to approach VCs (Venture Capitalists) very early in a start-up’s life cycle. It is not prudent to approach them to kick-start your start-up. As an aspiring entrepreneur you should understand that out of the complete process of entrepreneurship, execution is the most difficult step to implement. Executing your business idea to an up and running company is complex. But it is a very important step to reach if you are looking for VC money. If you are looking for funds from a Venture Capital then you must approach them only after your start-up has reached a certain stage in business.

Though there is no hard-lined definition of how the VCs are structured in terms of getting their own funds, the most common form of Venture Capitalist firms are companies which bring in the other people’s money and the fund managers prudently invest them in high growth opportunities. It could also be a fund allocated by larger organizations or institutions to be managed by fund managers. Sometimes it is also in the form where the partners pool in their wealth and further raise money from other high net worth individuals. Since the fund managers have the responsibility of investing in avenues which promise certain high growth rates, they usually do not invest unless there are certain parameters which meet the rules laid down by them.

Some of the criteria that most of the VCs usually look for are listed below:

Proof of Concept:

Your start-up should have attained a proof-of-concept maybe with more than one client. Having a proof-of-concept is like showcasing that your idea works in the real world and you have a few clients. So, your claims in the business plan that your business model is scalable are received with higher credibility. It also speaks aloud about the execution capabilities of your founding team.

Profitable Cash Flow:

Having a cash flow in your business plan is one thing but showing a profitable cash flow is what the VCs look for. Showing profits give the VCs confidence in the execution skills of the founding team. It is extremely difficult to start a business with limited funds and bring it to a level where you start showing profits. If you have reached this level, then definitely you possess the few important skills (such as innovativeness, ability to identify the right talent, ability to sell, creatively be cost effective etc.) that are absolutely essential to run an organization; and if you have brought a start-up to a stage where you can show profits, then it shows that you can very likely survive the bust periods in the industry. So, it will be appropriate to assume to some extent that you are here to stay.

Predictable Market Scalability:

What VCs look for is some predictability. Unless you are a second time entrepreneur, where your chances of getting the funding from a VC are higher (not guaranteed), it is difficult to get funding backed by VCs at very early stage. You must approach VCs only after reaching the two above-mentioned milestones have proof-of-concept with more than one client and have profits. Once you have a proof-of-concept and positive cash flow, there is some certainty with which the VCs can predict the total available market and the possibility of capturing a share in that market.

Good Team:

Before you approach a VC you should try to have at least a few people with good profile join your start-up. By good profile I mean that you should be able to identify the right talent. People that you hire should have relevant experience vis-a -vis your business and that they should have certain other qualities such as be self-driven, be self-motivated, have positive attitude etc. If you have the right fit on board, then you will be able to get results faster. Having a good team will help you in two ways. One this will definitely help you in getting to the clients faster and two it will send positive signals about you as a founder. It will instill a sense of confidence in VCs about you and your start-up.

Given the above four parameters it is still not guaranteed that you will receive a VC backed funding. You may still not get the funding if in case your business model does not have a distinct value proposition or in case you do not fall in the industries that that particular VC addresses.

About Mridula: Mridula is a freelance writer. She writes on Entrepreneurship and has worked for a start-up in the past. To know more check out her profile at LinkedIn/Mridula Velagapudi