Top 7 Things VCs Look for in Startups

The startup realm is buzzing with challenges. There are several pivotal decisions en route to success. One such critical phase is the decision to seek funding from venture capitalists. Once made, the challenge is to get funded with the key question on every founder’s mind being, “What will make us attractive to the right VC?”.

Let’s explore that thought. The Indian venture capital scene in 2023 showcases some striking shifts. Startup funding in India took a nosedive, plummeting by a significant 71.5% to $4.9 billion between January and August 2023, a steep fall from the robust $17.1 billion seen in the prior year.

Yet, despite this downturn, India maintains its global standing among the top five markets for VC funding activity, accounting for 3.1% of the total funding deals announced from January to August 2023.

Looking closer at specific funding transactions in India from January to August 2023 reveals interesting details. Notable deals include PhysicsWallah securing a hefty $250 million, Zepto raising $200 million, PhonePe bagging $200 million, Veritas Finance landing $146 million, and KreditBee closing an impressive $120 million round. That’s, of course, apart from a bunch of enthusiastic and innovative startups securing smaller rounds despite not being the darlings of the headlines.

So, what exactly attracts VC interest in startups? Here, we unravel the top 7 sought-after qualities that VCs prioritize, shedding light on the pivotal factors steering pitches in the fiercely competitive world of venture capital.

Top 7 Things VCs Look for in Startups

1) Solid Business Model

Investors, at the onset, encounter a crucial juncture resembling the initiation point on a treasure map – the business model. This isn't a mere checkbox, it encapsulates the very essence of how a startup envisions achieving success.

So, what exactly grabs the attention of investors within this business model? It boils down to a clear plan to convert ideas into revenue! Those days when innovative ideas attracted cash are sadly behind us. Today, it's all about translating that idea into tangible financial returns. Investors seek assurance that a startup has a well-defined roadmap for profitability, whether disrupting the market or not.

However, the focus isn't necessarily on immediate financial gains. The most effective business models possess a superhero-like quality, which is “adaptability” to navigate unforeseen challenges. Investors comprehend the evolving nature of the business world and favour startups equipped to evolve in tandem. Hence, a startup's plan should exhibit flexibility, poised to grow in sync with emerging opportunities.

2) Strong Management Team

Let's zoom in on the next item VCs watch closely in startups: the team steering the ship – the management crew. Picture it like the Avengers assembling for a big mission. The folks leading the way are crucial.

VCs seek a startup with people who know their game. It takes the right folks to transform ideas into reality. These folks need to bring diverse skills and experiences to the table, handling all the little details and the big strategic moves.

Why does this matter so much? A robust management team acts as the backbone of a startup. They call the shots, steer the company, and navigate hurdles. VCs understand that even the greatest idea can struggle without a capable team to push it forward.

So, when VCs assess startups, it's not just about the product or service, they're deeply analysing the people in charge. A startup backed by a strong, adept management team stands a better chance with investors, laying the groundwork for success in the competitive business realm.

3) Unique Value Proposition

VCs actively seek what makes a startup unique. It's not merely about offering a product or service for a couple of dollars less. This is about presenting something extraordinary that customers can't easily find elsewhere. This uniqueness might stem from a novel solution to an existing problem, an innovative approach, a richer and more fulfilling experience, or even a one-of-a-kind technology.

VCs actively seek what makes a startup unique. It's not merely about offering a product or service for a couple of dollars less. This is about presenting something extraordinary that customers can't easily find elsewhere. This uniqueness might stem from a novel solution to an existing problem, an innovative approach, a richer and more fulfilling experience, or even a one-of-a-kind technology.

Industries showcase myriad examples highlighting the potent impact of a unique value proposition:

Apple: “Think different” is in Apple's slogan ethos. It helps it position itself as a brand synonymous with innovation and creativity.

Visa: Embracing convenience and accessibility, Visa claims to be “Everywhere you want to be,” ensuring a seamless payment experience.

Nike: Beyond selling products, Nike's “Just do it” tagline sells a lifestyle and mindset, embodying determination and action.

These distinctive value propositions have been pivotal in shaping these brands, allowing them to carve out niches in their respective industries. Similarly, venture capitalists, in scrutinizing startups, seek that distinctive spark that sets them apart.

4) Scalable Market Opportunity

VCs love startups in markets that can grow big. If the startup is trying to solve a hard problem in a growing market, nothing could be better! A scalable market opportunity means there's a bunch of customers who could benefit from the startup's product or service, assuring the future.

Think about a company making an app. If the app solves a problem that many people have and lots of people can use it, that's a scalable market opportunity. VCs like startups that could get a bunch of customers, suggesting the chance for significant growth.

Why does this matter to VCs? Well, they want startups that can become big players in their industries. A scalable market opportunity means the startup could get more customers and grow its business over time.

5) Traction and Growth Potential

VCs really like startups that are getting some traction. Traction means the startup is already gaining attention in the market – people are interested, and there's proof that the business is taking off.

Think of it like a snowball going down a hill. The more it goes, the bigger it gets. Similarly, VCs want startups with traction, meaning they are grabbing attention and customers are coming in more and more.

Traction is like a sign of possible success. If a startup is already moving and attracting customers, it shows it could grow even more. VCs want to support startups that are going up, and ready for some serious growth.

6) Realistic Funding Needs

Startups need to know exactly how much money they need and what they will use it for once they get it. It's not about asking for a ton of money just because it's there. It's about figuring out the right amount of funds to achieve specific goals, like making a product prototype, hiring important people, or expanding marketing efforts into new territories that need more investment.

They should make a detailed plan explaining where the money will go and what they expect to achieve. This kind of openness helps VCs understand how their investment will be used and the potential returns.

For example, if a startup asks for way too much money without a clear plan, it might show they don't get what's happening in the market. On the flip side, a startup that gives a well-researched and sensible funding proposal, matching its growth stage and goals, is more likely to catch the eye of investors.

7) Clear Exit Strategy

An exit strategy must be visible to the investors. This shows how and when investors can cash out their investments. It might mean the company gets bought by a bigger one, goes public with an IPO, or even the company's management buys it.

VCs want to make sure they can eventually sell their part in the startup and get their money back. A clear exit plan gives confidence to investors, showing the startup has thought about the long-term and how investors will get their gains.

If a startup doesn't show the road to a clear exit strategy, it might worry investors. They want to know how they'll sell their shares and make money. But a startup with a solid exit plan shows they've planned it out, which makes them more interesting to investors.

Wrapping Up — How Ontropi Can Help

To sum it up, breaking into the venture capital world demands a strategic mindset, and grasping the 7 essentials VCs seek in startups is vital. A robust business model and a well-defined exit strategy are among the pivotal elements influencing investor interest.

As you set out on your startup adventure, Ontropi is here to support you. By tackling these crucial factors, you not only boost your appeal to venture capitalists but also pave the way for a thriving and lasting venture. Reach out to Ontropi now and take your startup to new heights in the competitive funding arena.