Key Factors a Venture Capitalist Analyses before Investing in a Startup


Investing in a startup may have unlimited potential waiting to be exploited but it also carries the risk of failing hence causing the investor to walk away with nothing. As Benjamin Graham said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.” 

Finding a startup with a USP and competent executors is not a hurdle, but choosing the right roadmap to invest the money is the most anxious and analytical decision. Here are a few factors consider by Venture Capitalists before taking shareholding of a company:

  1. Value propositions of the Products and Services

The product must have a balanced utility, affordability, and uniqueness. In short, the product must have scalable value proposition, which will eventually lead to the successful implementation of their company by acquiring a defined customer base. Once the Target Audience Market (TAM) are interested in purchasing the products, then there’s no limiting the company from growing.

  1. The Systems, Plan, and Structure Of The Startup

Investors hunt for systems and plans which don’t always refer to experience but having an effective system that will work and generate money is valuable to startups because they can operate and grow in a strong and trustworthy structure. Having a plan indicates that they have goals for their system to build toward.

  1. Look Over the Legal Aspects

This involves various documents like formalizing a business structure and founders agreement which includes every minute detail regarding the company from the number of members to taxation and foreign ownership. It also involves the acquisition of business licenses and abiding by the accounting laws, labor laws, and commercial laws of the country. Investors must closely investigate these documents before they proceed to avoid any legal risks which may arise. 

  1. Dynamic market opportunity

This is an extremely important factor as it poses the question of ‘How big is the addressable market that the company is looking to serve?’ The adjective ‘big’ is not only defined by the present market scenario but also by the treasures that the future holds for the product. Investors should understand that rising tides lift all boats causing many of them to place bets in new, promising sectors.

  1. Target Audience Market

An investor must completely understand the target audience which is a very narrowed term considering the target market. The target audience may be the population belonging to a specific age, gender, occupation, status, or a combination of them. This shortlisting will help create better advertisements and reach the appropriate audience efficiently.

  1. Barriers in the Market

The market includes barriers like natural barriers like distance or language, tariff barriers like taxes and even non-tariff barriers like laws and politics. Understanding these in terms of the company, its product, and how the company plans to tackle them helps us understand in-depth, the company’s strategic planning and preparations.  

  1. Exit Strategy of the Stakeholders

There are founders who are great at working in teams of 10 but struggle on a team of 100. Some founders want to scale a company for 10 years, while others will get bored and want to start something new. Investors should ensure agreements and terms are in place to allow for a clean founder exit that is not disruptive to the business.

Categories: Investment Basics

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