The Three Questions Venture Capital Investors Will Ask

You'll still have to convince venture capitalists that your brilliant inventions aren't a waste of time.
Magazine Contributor
3 min read

This story appears in the February 2011 issue of . Subscribe »

Let's say you just came up with an idea that could become a household commodity: a radical new design for a commode. We're not just talking a variation on a theme--like adding a few extra inches here or there, tricking out the seat or adding a sprinkler system--we're talking a quantum leap in how we go about our business.

Investors ought to be queuing up to get a piece of the action, right? Wrong.

The world is full of people with great ideas--like Thomas Crapper, the original inventor of the commode. But unless you can convince investors that you're capable of delivering the goods, persuading the world to buy your fancy throne and managing phenomenal growth, they'll write it off as just another pipe dream.

What professional investors want is to make money--lots of it. That's not because they're greedy, it's because the majority of their investments don't work out.

The National Venture Capital Association estimates that only 20 percent (or less) of venture-backed companies produce a significant return, 40 percent achieve moderate success and the rest fail.

The VC business model doesn't work without those few big hits. For every Starbucks and Whole Foods--both venture capital success stories--there are four VC-backed companies you've probably never heard of and another four you'd know only if you regularly peruse bankruptcy notices.

So from the thousands of pitches VCs receive each year, how do they decide who's worth the risk? It may sound simple, but essentially the pros ask themselves three questions:

Can we win?
Are you the kind of person who can grow a company to $50 million or $100 million in revenue in three to seven years? Is your business model scalable to achieve that kind of growth? Do you have a team of employees, advisors and others who've "been there, done that" and won't be making it up as you go along? Are you qualified to lead that kind of high-performance organization?

Will we win?
Is the market big enough to support that kind of growth? Do you have a concise plan for how you're going to reach potential customers and persuade them to … er, get off the pot? What's going to keep American Standard, Kohler and Crane from copying your idea and building it cheaper, faster or better? What might go wrong with your plan, and how are you going to deal with it? Are you willing to dramatically change your business model if that's what it'll take to win?

Will it be worth it?
Do you have a good understanding of your costs and capital needs? Are you offering investors a reasonable price? Will investors be able to earn five to 10 times their investment in five to seven years through a company sale or public offering?

Even if you're not looking for investors and your goals aren't as lofty as theirs, you can learn from the pros. The next time a great idea strikes, test it with these three simple questions. The exercise may just save you from flushing your money down the drain.

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