The investment ecosystem has changed tremendously in the last two and a half decades. Several famous startups, including Facebook, Apple, Intel, Google, and others, have entered the scene. Together, they have changed the world of business forever.
Much of the credit goes to VC firms fascinated by these startups. According to 2015 data, only 20% of US public companies were backed by VCs in 2015. Though VC firms have wholeheartedly contributed to and encouraged early-stage startups, the actual venture capitalists often worked behind the doors.
It’s necessary to understand how venture capitalists make decisions. They don’t follow a hard-and-fast rule or any particular process or system of investing.
However, for the benefit of our readers, we want to delve deep and tell you how venture capitalists make decisions:
Identifying the Right Deals
VCs are known for striking the chord. They first connect with startups with tremendous growth potential and discuss the startup founders and team for further processes. How does a venture capitalist get leads? The answer is their network.
In business, it is often said that your network is your net worth. So many times, VCs get some of the most profitable-looking startup investing options through their network of former colleagues, investors, and entrepreneurs.
Keeping a tab on the funnel
No doubt, gaining funds from VCs is difficult. On average, out of scrutinizing 100 startup firms and their vision, a VC may consider only one for final shortlisting.
Thus, it is more than just a pitch deck; even your startup needs to be unique and should focus on a revolutionary idea addressing customers’ pain points. Once they find something interesting, they stick to that startup and consider it for funding.
If you are a startup founder and meeting a venture capitalist for the first time, here are some expected questions to follow:
- How much can you do for your startup?
- What is your vision for the startup?
- How does your vision translate in terms of ROI for venture capitalists?
Though the actual questions can vary, the above three questions can help you understand the kind of information that a VC might be looking for.
After the deal
Consider yourself lucky if a VC firm has called you for further information or negotiation. If they decide to invest in your firm, it’s most likely that a number of contracts will be there. You must sign them carefully, paying attention to cash flow rights, liquidation rights, and other types of rights. VC deals are crafted in such a way that they can get a good ROI and also retain control of the startup.
Playing a Key Role in Advisory Services
When a VC has put their money into your startup, you can expect them to be the real boss. They become active and offer advice and strategic guidance so that the startup moves in the right direction, which can benefit both the startup founders and the venture capitalists. You can expect a VC to advise you on hiring board members, appointing key team members in the higher echelon of management, helping you connect to new investors and customers, and buying new plants, machinery, and computers to improve your staff’s overall productivity and efficiency.
In Conclusion
As stated, this article only gives you a broad idea of how VC firms make decisions; the actual process can vary. Moreover, it’s always challenging to understand what’s on the VC’s mind
Some VCs follow their passion for investing in startups that align with their investment goals, others opt for impact investment for sustainable living, while others might invest in a revolutionary startup idea that will likely disrupt the world through its products or services! So, it’s always better to have a detailed discussion with the VC once your firm gets shortlisted for funding.
I’m the CEO of SPV Hub. Being a founder/ co-founder (of multiple businesses) and investor (in multiple startups) myself, I experienced the challenges that an investor and a founder face while raising capital and handling multiple deals. So, we created SPVHub to simplify everything related to SPV creation and management.
I am also the co-founder of Startup Steroid.
