3 Things VCs Are Looking For
Get the working capital your business needs–learn more about Entrepreneur Lending, powered by CAN Capital »
People are often surprised when I respond to their pitch with glowing remarks on the idea, only to tell them there’s no way it’ll get venture capital funding. I go on to explain that VCs want to see potential for the classic hockey-stick growth curve before they make an early-stage investment. Here’s what they’re looking at.
Market size. Venture-backed businesses need to create or be a part of massive addressable markets—think, the entire world or at least $1 billion in lifetime revenue. Addressable is the key word, and here’s what I mean by it: Your favorite local burrito joint with lines out the door may be making money, but it’s not addressing the total global market for beans, rice and tortillas. This is the biggest kind of nonstarter for sophisticated VCs.
Scalability. Assuming the market is big enough, the next check box is whether the product or service can scale. There is a reason drugs and software fit easily into the venture model. Once these are developed, manufacturing is cheap, and there are few barriers for distribution. The need for scalability often rules out businesses that hinge on manufacturing complex physical products, those that require substantial investments in real estate and inventory, or those that take extensive time to sell to customers individually.
Time horizon. Like you, VCs are on the clock to make a return on their investments before time runs out. Even if your business idea has a healthy market size and scalability, you’ll need to show that you can pull that off within a set number of years. VCs typically plan on holding investments for five to seven years. That may seem like forever to you, but remember, not everything goes as planned when you take a product from idea to massive enterprise.
Even if you can’t check all three boxes, you may still have an excellent business idea that could make you rich. But you’ll likely need to go elsewhere to finance your dream. Think about approaching more patient investors or taking on debt financing.
And take comfort in the fact that VCs never backed the vast majority of successful businesses. That burrito joint down the street could become the next Chipotle—which, by the way, was turned down by more than a dozen VC firms before finding a partner in McDonald’s.