Originally from the Startup Magazine Premium
Your startup is ready to look for the next level of investment. With a proof of concept, slick presentation deck, and confidence to pitch to institutional investors, you’ve decided its time shine on the venture capital stage.
However, flashy tactics and showmanship cannot dazzle venture capital firms. Backgrounds in entrepreneurship and years of experience analysing both business models and founding teams means you’re pandering to the experts. These experts have seen the full spectrum, from great startups to questionable ones, investing only in the companies they have confidence in.
The million-dollar question, or rather the billion-dollar question for some of these new companies, is simple: what do venture capital firms look for?
Stephan von Perger of Wellington Partners, can help answer this question. Wellington Partners, a London-based VC firm, has invested in companies like Hailo, Yplan, and Spotify to name a few. In doing so, Wellington has made a big name for itself, identifying some very impressive companies early on.
Stephan says that from the perspective of a VC firm, there are some very clear signs that a business will either succeed or struggle. Here are some of the distinct red flags that Stephan has seen in his experience that would indicate that a startup is not ready for investment.
You need a smart, put-together team. A small business is only as good as its founders and employees, and there are some pretty clear signs that your team or business may not meet their required standards:
A team lacking relevant experience with no background in the industry they’re trying to be successful in.
Co-founders who don’t want to commit and work full-time.
Founders who cannot distinctly identify their role in the business.
Simply put, successful startups are built by high impact teams. Your team dynamic is impossible to fake in a pitch. That being said, your true colours will show when presenting and therefore so too will your team dynamic. A lack of commitment to the product and the team is an easy way to spot a that a company isn’t ready for higher levels of investment.
You’re not required to be a coding genius as the CEO of a tech startup. However, the technical portion of your company is crucial from the perspective of a VC, says the investor. Dangerous signs from a company which is lacking technical foundation include:
Lack of a co-founder with technical background.
No ownership of IP for the software or technology behind the business.
Outsourcing all of the technical product development in the early days.
Though there are plenty of quick and accessible methods of outsourcing work, successful companies need to know how they got to the product that they’re trying to sell. This does not just apply to technical work: outsourcing pitch deck production and investor outreach to bankers and advisers can equally be frowned upon by early stage investors.
History of the business
VC firms are constantly investigating a company, including past events and developments that the company and its founders have gone through. If you’ve got skeletons in the closet, VC firms will most likely find out whether you address them openly or not:
A co-founder who has “mysteriously” left the company.
Previous investors who have decided to no longer support you after their initial investment.
CEO’s who cannot appropriately answer all basic questions about key aspects of their business during a pitch meeting.
Don’t make it a secret, says Stephan. Addressing the past, even if it is potentially negative is important in order to be transparent. Acknowledging former mistakes and using them as information to inform how you move forwards is key to showing your commitment to a business that has learned and grown from its previous shortcomings.
Forewarned is forearmed. Knowing what a VC firm looks for in a company can make the difference between success and failure in fundraising. Being sure that you don’t exhibit any of the characteristics mentioned will increase your likelihood of securing investment.