For Subscribers

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.

By Kate Lister

Opinions expressed by Entrepreneur contributors are their own.

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.

Kate Lister is a former banker, small-business investor and veteran entrepreneur. Her books and websites include Finding Money: The Small Business Guide to Financing and Undress For Success: The Naked Truth About Making Money at Home.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Culture

A Slack Channel or Meditation App Won't Fix Mental Health — Here's How to Lead Like It Matters

Mental health should be treated as a core component of your company's infrastructure, not an afterthought or perk. Neglecting it leads to diminished productivity, burnout and high employee turnover.

Business Ideas

70 Small Business Ideas to Start in 2025

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2025.

Leadership

As a Leader, You Set the Tone — Here's Why Staying Calm Builds a Stronger Business

One thing I know unequivocally is that your mindset as a leader directly impacts your entire organization.

Business News

'The Decade of Autonomous Vehicles': Nvidia CEO Predicts Major Growth in Robotics, Self-Driving Cars

At the VivaTech conference in Paris this week, Nvidia revealed its autonomous vehicle development platform for automakers to build self-driving cars.

Business News

Shaquille O'Neal Is Settling the FTX Class Action Lawsuit Filed Against Him By Investors. Here's How Much He'll Pay Out.

NBA Hall of Famer Shaq is settling a class action lawsuit brought by FTX investors who claim they were misled.

Business News

Deloitte Is Reimbursing Employees Up to $1,000 — For Buying Lego Sets

Each Deloitte employee can spend up to $1,000 on items to improve their well-being.