By Garage Technology Ventures
Across different venture capital and corporate investment firms, investors differ in the criteria they use for funding a company. Some invest only in specific technologies at certain stages, while others only invest in certain technology sectors or geographic locations. But in the end, all investors use the same foundational criteria in assessing whether to fund a company. We’ve identified the top 7 of these criteria. Violate them at your own risk!
Every entrepreneur believes his or her idea is compelling, but the reality is that very few business plans present ideas that are unique. Investors quite often see multiple versions of the same idea over the course of a few months and then again after a few years. So what’s the type of compelling idea that investors are looking for? A compelling idea is one that offers an elegant solution to a big problem or opportunity. If you can’t articulate either—a big solution and a big problem that your solution solves—it might be time to go back to the drawing board.
You may have a great idea, but if you don’t have a strong core team, investors aren’t going to be willing to bet on your company. This doesn’t mean you need to have a complete, world-class, all-gaps-filled team. But the founders need to have the credibility to launch the company and attract the world-class talent that is needed to fill the gaps. The lone entrepreneur, even with all the passion in the world, is never enough. If you haven’t been able to convince at least one other person to believe in the business as fervently as you, investors certainly won’t. Winning over investors (and customers and co-workers) depends on your people skills, not just your technical prowess.
If you are focused on technology, you should target a sector that is not already crowded, where there is a significant problem that needs to be solved, or an opportunity that has not been exploited, and where your solution will create substantial value. Venture capital is focused on businesses that gain a competitive edge and generate rapid growth through technological and other advantages. Contrary to popular belief, it’s not about how big the market is; it’s about how much value you can create. Brilliant new companies create big markets, not the other way around.
What makes your technology so great? You must show that your technology would be able to reach a significant number of customers who desperately need or want that technology. It’s not enough to show the existence of some techie geeks who would buy your product because they think your technology is cool. Assuming you have a technology advantage right now, how are you going to sustain that advantage over the next several years? Patents alone won’t do it. You better have the talent or the partners to assure investors that you are going to stay ahead of the curve.
Every interesting business has real competition. Competition is not just about direct competitors. It includes alternatives, “good enough” solutions, and the status quo. You need to convince investors that you have advantages that address all these forms of competition and that you can sustain these advantages over several years. A few years ago, entrepreneurs could get away with saying that “competition validates my solution,” but today that’s not good enough. Moreover, you have to show that you have a good way to reach your target customers and beat out your competitors. As a friend of mine has said, it’s not good enough to build a better mousetrap; you have to really want to kill mice.
If the idea of developing credible financial projections makes you wince or wail, or if you think it’s a meaningless exercise, you are not an entrepreneur and you shouldn’t ask investors for money. Your projections demonstrate that you understand the economics of your business. They should tell your story in numbers—what drives your growth, what drives your profit, and how your company will evolve over the next several years.
Probably the most important factor influencing investors is validation. Is there good evidence that your solution will be purchased by your target customers? Do you have an advisory board of credible industry experts? Do you have a co-development partner within the industry? Do you have beta customers to whom investors can speak? Do you already have paying customers? What other brand name validators can you offer? The more credibility and customer traction you have, the more likely investors are going to be interested.
To secure venture funding today, you need an excellent grade in all seven areas, and an A+ in at least a couple. It’s a tough environment out there, so don’t waste your time with a story that is not compelling and credible.