Entrepreneurs who want to raise funding for their start-ups and business ventures should turn to early-stage investors like venture capitalists. However, it is not easy to find the right venture capitalist, and it is even harder to make a suitable deal with them. According to various sources, only about 0.05% of start-ups are able to secure funding from investors. Venture capitalism is a growing trend that has seen a recent downfall.
According to Business Standard, India’s share in global venture capital funding fell 2.9% to the lowest since 2019, reaching $7.3 billion in 2023. This is mainly because venture capitalists take huge risks by funding small start-ups, and sometimes they don’t find the right start-ups to fund, which lowers the national tally. According to Indiabiz.gov, India registered a staggering 100,000 start-ups in 2023, and according to Entrackr, only 980 start-ups were able to secure venture capital funding. To keep securing the best funding possible for their start-ups, entrepreneurs need to know the determining factors in venture capital decision-making.Â
Table of Contents
Management
According to top investors, management is the most important factor venture capitalists take into consideration. As per a study conducted in the US, 82% of businesses fail due to a lack of management. This is why having a good management team is very important to securing decent venture capital funding. VCs are looking for a team with qualified people who will play important roles in the company’s development. There is a saying that a VC would rather invest in a bad company with good management than in a good company with poor management.
Size of the Market
Market size is another important factor a VC looks at before making a decision. It is one of the most important things for a new business or start-up. Ensuring that your target market’s size is big is important to securing funding from VCs. Mostly, for VCs, a good market size means a market that has the potential to generate $1 billion in revenue. The bigger the market, the better the likelihood that the business will generate millions in revenue. This assures a VC that they can exit the investment anytime they see fit, with a profit.
Financial Metrics
Evaluating a company’s financial metrics is vital to any venture capitalist. Financial metrics like revenue, profit after tax, expenses, EBITDA, and many others paint a precise picture of a company’s financial performance. VCs don’t just look at the revenue of a company. Some of India’s biggest companies earn a lot of money in revenue, but they still close their year with hefty losses. For example, one of India’s biggest food delivery platforms, Swiggy, made Rs. 5,361 crore in revenue in 2023. However, their expenses were far greater than their revenue. As a result, Swiggy ended the year with a Rs. 3,757 crore loss. This is why VCs like to examine a company’s financial metrics thoroughly.
Product Characteristics
A market is never saturated with a good product, but it is very quickly saturated with a bad one. – Henry Ford. These are the words of the founder of the Ford motorcar company, Henry Ford. This quote emphasises how important a product is for a company’s growth. According to various reports, 34% of businesses fail due to poor market fit. This is why product characteristics and innovation are so important for venture capitalists; when it comes to products, VCs like to own the patents and trademarks of the products, too. So, if any entrepreneur wants to make their business appealing, having a good product lineup is necessary.
Prior Investments
Whether or not a company receives a seed investment is very important for a venture capitalist. According to data from Luisa Zhou, 25 to 30% of VC-backed start-ups still fail. This is why VCs like to see prior investments. This shows the potential of a company. A company that is not able to perform well even after rounds of funding surely has something that is not right.Â
Securing funding from favourable sources is one of the best ways to ensure your business expands. However, getting VCs onboard is a tough task, and it takes a lot of prep work and research to do this. According to various sources, 30% of all start-ups fail because they are unable to secure funding for their ventures. However, understanding the factors vital for venture capital decision-making can ensure that an entrepreneur can secure their desired funding.
