7 Things a VC Looks for in a Startup

With the number of startups mushrooming all over the world, one would think that investors are just dying to give away money to new business ventures. Take the case of unicorn startups for instance. Once an unheard of phenomenon (hence the name unicorn startups), these are startup firms that are valued at $1 billion or more. Business Insider Australia reports that a new unicorn startup was born every week in 2015. At the time of writing this piece, there are 124 unicorn startups worldwide, with a combined valuation of $ 468 billion.

All of these numbers probably excite a wannabe entrepreneur and spark the hope that their new venture has what it takes to become the next big unicorn. Unfortunately, it’s not as easy as it looks.

Securing venture capital funding is serious business. Venture capitalists get hundreds of business proposals a week. Of these just a handful even get considered for an initial pitch presentation. So what do these VCs look for in the firms that they shortlist? Here’s some insight.

Solid Business Idea

Go to a VC with a plan to build human colonies on Mars, and chances are you’ll not even be called in to present your thoughts. That does not mean VCs don’t invest in innovative new ideas or cutting edge technology. They do. However, the chances of securing funding are exponentially higher if you are a real business with a real revenue model and a clear path to market.

Your business should be differentiated enough from competition, with a clear USP that makes it attractive to investors.

Strong Leadership Team

Just as “Clothes maketh the man,” a leadership team that knows the business inside out is a bare minimum requirement for any aspiring startup. Venture capital firms essentially give out large sums of money in the hope that your business will keep growing and eventually bring extremely profitable returns. Most VCs don’t involve themselves in the day to day workings of the companies they invest in. Instead they depend on a sound management team to steer the companies in the right direction.

Therefore, having a leadership team that understands the technology behind the business, has the right network of contacts, manages employees beautifully and most importantly, gets along well with each other is a pre-requisite of serious VC funding.

Steady Cash Flow

Just about 1% of all businesses that approach VCs for funding end up getting any money at all. With a failure rate of 99%, it’s vital that you do everything in your power to ensure that your startup does not get the thumbs down in the cut-throat arena of venture capital funding.

A good way to ensure that is by approaching VCs only once you have established a clear revenue model and a steady cash flow to support it. When a venture capitalist sees that your startup is not just another whacky plan, but a living, thriving business, the chances of you receiving a favorable ear are far stronger than otherwise.

Flexibility

A surprisingly large number of businesses that are successful today did not start out doing what they do now. Did you know that YouTube began life as a video dating site? Or that Twitter was not originally a microblogging behemoth, but actually supposed to be a podcast discovery and delivery platform?

A huge reason behind the smashing success that these companies saw was thanks to the fact that they were flexible enough to change course radically when things got tough. I don’t mean that you must bail and move on to something else at the first opportunity, but what you do need is an inherent openness to try new product lines, alternate routes to market or even a major tweak in your core product.

Scalability

A business is investment-worthy from a venture capital perspective when it is in a constant state of growth and has a visible long upward trajectory ahead of it.

Suppose you have a super successful blog – something that rivals say, TechCrunch. A definite way of growing investor interest in your publishing website is by indicating to them how easily you can turn a key and expand into becoming an e-commerce site. A scalable business that can be expanded to newer markets, product lines or distribution channels offers a venture capitalist hope that their investment will not easily result in a crash and burn situation.

Market Potential

We spoke of scalability of the business earlier. However, no matter how scalable a business may be, if the market it operates in is limited, there is very little hope that a venture capitalist will even touch it with a barge pole. Things like a large, growing industry, a favorable geographic location, high entry barriers to competitors are all positive indicators for a company with strong market potential.

Another important aspect to consider is the regulatory environment of the industry your startup operates in. Businesses that operate in extremely controlled industry segments with a high degree of government oversight (e.g. defense manufacturing, tobacco, pharmaceuticals) stand to have a tough road ahead in terms of VC willingness to invest.

Financial Attractiveness

This is probably the most important factor that sways a venture capital firm into investing in a startup. A business that has a proven track record and a strong projected growth rate is a tempting investment avenue for a VC.

Besides generating revenues, other financial indicators that help your case include having few existing investors, a low debt to equity ratio and a P&L statement that has already broken even. A clear and credible timeline that charts out the expected returns on the VC’s investment is a must to ensure your business has a fighting chance.

Wrapping Up

Starting a new business is pretty simple today. From registering the business to finding the right talent, everything is just a click away. As an entrepreneur seeking VC funding, your job is to make sure that you not only make use of the abundant resources at your disposal, but also package your business pitch in such a way that it stands head and shoulder above those of competing firms that enjoy the same advantages.

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A Startup’s Guide to Business Insurance

You’ve finally reached the end of the grueling journey in creating your first startup. We know the feeling, and we know how good it must feel to be here at the end. But before you start celebrating we need to cover a very important to do. Insurance. Your business needs it. After a grueling process of forming your company, you might have forgotten that you could lose all that hard work in the blink of an eye if you go forward without checking for the proper business insurance quotes. Below you will find business insurance tips that will help your startup stay safe and profitable for years to come.

Key Person Insurance

As a business owner, many people depend on you. Customers and employees alike look to you for leadership and guidance. Your company could suffer if you die without a mechanism in place to replace your expertise. If you have key person insurance, you have the assurance that your business has the means to continue if you or your key employee dies.

Upon death, key person insurance pays a sum to the company that will help the company recruit and train a replacement that can fill the shoes the death empties. When you buy this insurance, your key people will know how much you value them, building a cohesive team that will loyally work to achieve your goals. Vendors and banks also like to know you have key person insurance because it improves the chances your company will pay bills after your demise.

Directors and Officers Professional Liability Insurance

If you formed a corporation, you might need to buy directors and officers professional liability insurance. If you hold a board position, if your board of trustees makes controversial decisions, or if your products or services have the potential of harming people or property, people can sue your business for damages. When you have this type of insurance, your insurer will pay for claims made against you. With so many people in our society looking for ways to gain wealth through litigation, you cannot afford to go without this type of insurance.

General Liability Insurance

Regardless of where your business operates, its facilities represent a potential liability that could destroy it. General liability insurance provides coverage if someone gets hurt while on your premises or if a fire or natural disaster destroys your business property. According to personal injury attorneys, in cases of premises liability, a judge and jury look at several factors when determining if the injured person should receive a settlement, but ultimately a property owner is legally liable for injuries suffered by others on their premises. Your insurance will also cover problems resulting from false advertising, copyright infringement, and other acts that hurt others without bodily injury. You could incur substantial legal and medical costs if one person gets hurt on your business property. So buy insurance with the optional coverage you need to protect your firm.

Workers Compensation Insurance

If an employee gets hurt while working for your company, you could be liable for thousands of dollars of medical expenses. Workers compensation insurance makes sure your employees get the care they need for job-related injuries while protecting you and your company from liability. Laws and regulations where your business operates might mandate that you buy workers compensation insurance. As you shop, keep applicable requirements in mind to make sure you buy coverage that meets your legal and business requirements.

Business insurance for your startup can help your company survive lawsuits, accidents, deaths and other routine occurrences. Although you might face the temptation to avoid buying insurance to save money, the reasonable costs associated with business insurance makes it worthwhile in the end. So don’t think you’re cutting any corners by not getting insurance. What you will be doing is creating more of a headache later on down the road if you skip this very important step.

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