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How to Evaluate Your Startup Like a VC The are six factors that investors will focus on when evaluating your business. Know them by heart.

By Steve Tobak Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

When you build a startup, the most important thing to understand is how venture capital firms evaluate companies. That is the litmus test for any business. After all, they're the pros. They've been doing this for decades. And they know what they're doing better than you do, that's for sure.

That's not to say you can't have a successful business without meeting their subjective criteria. Plenty of entrepreneurs were turned down by dozens of VCs and still went on to disrupt big markets and become wildly successful. Sometimes the idea that everyone says is crazy becomes the one-in-a-million like Google or Skype.

So how do VCs determine if startups are worth investing in? It's no secret, but the way I see most entrepreneurs positioning their companies, you'd think it's the formula for Coca-Cola or the specs for Apple's next big iThing.

Granted, VCs are individuals with their own unique experience, perspective and thought process, so they don't evaluate startups the same way. But having worked with dozens, maybe hundreds of VCs, strategic corporate investors, and investment bankers, I can tell you with reasonable certainty that there are six things you have to nail if you want to get any reasonable traction from professional investors:

The problem. What tough problem, market need, or customer pain point are you addressing? Why is it important to solve this particular problem? For example, Uber's problem would be: "Getting a cab or a car to take you from point A to point B is a real pain. There should be an app for that."

Tip: It's a big help if you can find a way to present the problem so it resonates and hits home with potential investors. Make it personal for them.

Related: How Successful People Make Their Own Luck

The solution. What is your unique solution to the problem, how does it work, and how is it 10-times better than other solutions to the problem? Clearly define the concept and how you plan to demonstrate it, as well the products and services and how you plan to develop them. Does your solution require a unique ecosystem or is that already in place?

Tip: Don't get too deep in the weeds. Remember, VCs are generalists that aren't typically experts in your particular field.

The market. Who will the customers be and how big is the market opportunity? Provide the total available market, the segment you plan to service, and a timeline that shows how you plan to enter and capture that market, over time. Explain any assumptions you've made.

Tip: The market opportunity should be relatively big ($100 million to $1 billion or so), but not unrealistically so. It's a fine line.

The competition. What current or future solutions, technologies, or companies may compete with yours in the market? How is yours differentiated; what's its unique value proposition relative to the competition; why will your solution win? What intellectual property or other barriers to entry will keep you ahead of the competition?

Tip: The best-case scenario is that your solution is readily doable by you, but you'll be putting up big barriers for others to follow. If not, you have to demonstrate how you plan to stay ahead of the pack that will converge on this hot opportunity.

Related: Should Gay CEOs Come Out of the Closet

The team. Who is your management team, what is their background and why are they uniquely qualified to run this venture and deliver the solution to market? Are there any significant holes and how do you plan to fill them? How do you plan to scale to meet the goals of your business plan?

Tip: This is the most important factor for many reasons: They're going to be with you for the long haul, there will be tons of major hurdles, and if your concept doesn't pan out, the capabilities of your team will determine whether you can effectively pivot or not.

The business. What is your business plan? Provide a multi-year income statement and capitalization plan that includes how much money you plan to raise, when you will need it and what will you use it for. What key assumptions are you basing your plan on?

Tip: It's fine to have a spreadsheet as backup, but that's way more detail than anybody's going to want to see up front. Initially boil it down to two or three slides. Also, avoid "then a miracle occurs" steep hockey-stick growth curves. They're generally not credible.

The kicker is you've got to somehow get all this on a one- or two-pager (text) and a 20-slide pitch. Still, it is a powerful exercise for three very important reasons:

First, this really is what it takes to turn a startup into a successful growth company.

Second, if you can get professional investors to write a term sheet and cut you a check, that's validation of your concept, big-time.

And third, sooner or later, you're going to have to answer all these questions … and sooner is way better than later.

Related: Want to Be a Better Manager? Get a Dog.

Steve Tobak

Author of Real Leaders Don't Follow

Steve Tobak is a management consultant, columnist, former senior executive, and author of Real Leaders Don’t Follow: Being Extraordinary in the Age of the Entrepreneur (Entrepreneur Press, October 2015). Tobak runs Silicon Valley-based Invisor Consulting and blogs at stevetobak.com, where you can contact him and learn more.

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