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What Do Venture Capitalists Look For?

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Last editedJun 20222 min read

When your business needs funding, one option is to seek out venture capital. From small-scale angel investors to larger firms, there are numerous investors willing to provide support for growing businesses. But with a fiercely competitive market, how can you stand out from the crowd? You need to think like an investor. So, what do venture capitalists look for?

How to get venture capital investment: getting started

Although you should already have run the calculations and formulated a solid business plan, one of the first steps in obtaining venture capital is finding out who is accepting pitches. A good starting point in how to get venture capital investment is to speak to your accountant, financial advisor, or solicitor. Dedicated brokers also connect venture capitalists with businesses for a hefty fee.

Whether you seek advice from a broker, solicitor, or accountant, you’ll need to include this consultation into your budget. The British Private Equity and Venture Capital Association is also a good place to start, with a directory listing its members by preferred industry.

How to get venture capital for small businesses?

There are unique concerns for the very smallest businesses, who not only have fewer connections but also may not have a track record of success to show investors. Figuring out how to get venture capital for small businesses boils down to two primary factors:

1. Market research

Venture capitalists want to know that you’ve left no stone unturned when researching your market. There should be a clear market opportunity with high potential for growth. Venture capitalists want a high rate of return on their investment, and that involves taking over a significant market share. You need to prove that you understand your competition, customer pain points, and market demographics.

2. Product quality

The other key factor is the strength of your service or product. If your business is untested, venture capitalists will only work with entrepreneurs who have a truly outstanding product from a competitive standpoint. You should have created a solution to an existing problem that’s likely to sell itself within the marketplace.

Of course, a good business plan, leadership team, and risk assessment are also required. This is the same as with larger companies, as we’ll discuss below.

What do venture capitalists look for in a business plan?

Big or small, businesses hoping to attract the attention of venture capitalists must have an impressive business plan. This is the first thing you’ll be asked for by any investor, clearly showing your path to profitability in both the short and long term. There should be clearly defined goals and a mission statement, as well as elements like the following:

  • Your qualifications and background

  • Unique selling point

  • Sales and profits figures, both historic and projected

  • Balance sheet

  • Cash flow projection

What do venture capitalists look for in the management team?

Some investors are more open to working with new entrepreneurs than others, but all will want to know who is in charge. You need to put a talented, professional management team in place. Your investor is being asked to contribute their own funds, so the business’s management team should be willing to do the same. Will earnings be tied to performance? What contracts are involved?

Be prepared to answer questions about background, experience, and motivations. Venture capitalists will also want to ensure that the company founders understand the business’s key metrics. You should show a strong understand of key performance indicators like the following:

  • Sales funnel

  • Revenue growth

  • Customer churn rates

How to get venture capital: the bottom line

Every investor is different, but when it comes to providing what venture capitalists are looking for, you can improve your position. Take your time with market research, product development, and crafting a solid business plan before you start approaching any advisers.

Finally, remember that it’s rare to obtain venture capital overnight. Expect a lengthy process as your investors perform their own risk assessments and due diligence. You’ll need to hammer out the legal and financial details of your arrangement at this time – all with the aim of a mutually beneficial relationship.

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