- All
- Financial Management
- Venture Capital
Powered by AI and the LinkedIn community
1
Market Opportunity
2
Team Quality
3
Traction and Growth
4
Valuation and Terms
5
Exit Strategy
6
Impact and Alignment
7
Here’s what else to consider
Venture capital is a form of financing that provides high-risk, high-reward funding to innovative and scalable startups. However, not all venture capital investments are successful, and there are many factors and metrics that influence the outcomes of these deals. In this article, we will explore some of the key aspects that both entrepreneurs and investors should consider when pursuing venture capital opportunities.
Top experts in this article
Selected by the community from 15 contributions. Learn more
Earn a Community Top Voice badge
Add to collaborative articles to get recognized for your expertise on your profile. Learn more
-
2
- Rutvik Deepak
17
- Michael Deem CEO and Founder | Venture Capitalist | Life Sciences | AI
8
1 Market Opportunity
One of the first and most important factors that venture capitalists look for is the market opportunity of the startup. This means the size, growth, and potential of the industry or sector that the startup is targeting, as well as the problem or need that it is solving or addressing. A large and growing market opportunity indicates that there is a strong demand and value proposition for the startup's product or service, and that there is room for expansion and differentiation. Venture capitalists use various methods and sources to assess the market opportunity, such as market research, industry reports, customer feedback, and competitor analysis.
Help others by sharing more (125 characters min.)
- Michael Deem CEO and Founder | Venture Capitalist | Life Sciences | AI
Typically, the VC will want any given investment to possibly "return the fund." So, if it is a $100M fund, the viable investments are those that might exit with a valuation supporting $100M back to the VC. If it is a $1B fund, then the VC is looking for $1B back to the fund. From the founder's point of view, this determines which funds are appropriate for her company. From the VC's point of view, this is a quick screening criterion on pitches.
LikeLike
Celebrate
Support
Love
Insightful
Funny
8
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
- Yoann Berno Democratizing Climate Tech investing 🌍| Investing in breakthrough climate innovations💥| Podcast Host at Climate Insiders 🎙️
VC funds have one obsession, finding that super-returner (call it unicorn). Amongst 20-30 investments, they need to hit that Unicorn returner. If they don't, their fund performance will be subpar, and they will grind to convince their LPs to continue backing them.You have to demonstrate WHY you will turn into that Unicorn. Period.To do so, you need to convince the investors that:-Your market is enormous-Your team has that unfair advantage to tackle that market (market insights, network, customer access,...etc)-Your product is sufficiently differentiated and can offer 10x more or better than what already exists-Your vision is so crisp, you're telling them about the future.-You just need money to make it a reality
LikeLike
Celebrate
Support
Love
Insightful
Funny
4
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
-
The "fit" between the VC and the startup can also be crucial. Some VCs specialize in certain sectors or stages of a company's growth, which could make them more or less interested in a particular market opportunity.Additionally, market opportunity alone isn't enough. VCs often look at the startup's team, the technology, and the scalability when making an investment decision. However, all these factors often relate to how they perceive the market opportunity.
LikeLike
Celebrate
Support
Love
Insightful
Funny
1
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
Load more contributions
2 Team Quality
Another crucial factor that venture capitalists evaluate is the quality of the startup's team. This includes the founders, the key employees, and the advisors or mentors. A high-quality team is one that has the relevant skills, experience, and vision to execute the startup's strategy and overcome the challenges and risks that it may face. Venture capitalists also look for team cohesion, diversity, and culture, as these aspects can affect the performance and morale of the startup. Venture capitalists often rely on their networks, referrals, and interviews to gauge the team quality of a startup.
Help others by sharing more (125 characters min.)
-
Think about the early days of Google. The founders, Larry Page and Sergey Brin, were both Ph.D. students at Stanford, bringing in top-tier technical skills and a strong educational background. Their advisor was a well-known computer science professor, which added credibility. The initial team was cohesive, had a clear vision for the search engine, and eventually built an innovative and employee-friendly company culture. This would have been seen as a high-quality team in the eyes of a VC.Further, Startups often have to pivot or adjust their strategies, and a team's ability to adapt can be a key determinant of success. VCs might look for past examples of how the team adapted to challenges to indicate future performance.
LikeLike
Celebrate
Support
Love
Insightful
Funny
1
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
- Michael Deem CEO and Founder | Venture Capitalist | Life Sciences | AI
VCs want to see cohesion on the team. They want to see that the founder is coachable. The VC has a huge amount of reference companies, and this knowledge bank can be useful to the founder who listens. Often the VC will give preference to founders who have experience. But, in a hot new area, or with really energetic new individuals, first-time founders can have an advantage.
LikeLike
Celebrate
Support
Love
Insightful
Funny
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
3 Traction and Growth
A third factor that venture capitalists consider is the traction and growth of the startup. This means the evidence and indicators of the startup's progress and success, such as its revenue, user base, customer retention, product development, and market share. Traction and growth demonstrate that the startup has a viable and scalable business model, that it can generate value for its customers and stakeholders, and that it can achieve its milestones and goals. Venture capitalists use various metrics and tools to measure the traction and growth of a startup, such as financial statements, key performance indicators, dashboards, and benchmarks.
Help others by sharing more (125 characters min.)
-
Consider Airbnb. In its early days, one key indicator of growth and traction was the number of listings and bookings. As these numbers grew, it showed VCs that not only were people willing to list their homes, but travellers were also keen on this new way of lodging. This made it easier for Airbnb to secure more funding, as they were showing clear evidence of a scalable and viable business model.In my experience, VCs often look for startups that are not just growing but are growing faster over time. A startup that shows accelerating growth might be more appealing because it suggests that they're onto something that's gaining popularity fast.
LikeLike
Celebrate
Support
Love
Insightful
Funny
1
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
4 Valuation and Terms
A fourth factor that venture capitalists negotiate is the valuation and terms of the startup. This means the price and conditions that the venture capitalists are willing to pay and accept for their investment in the startup. The valuation of a startup is based on various factors, such as its market opportunity, team quality, traction and growth, and comparable deals. The terms of a venture capital deal are outlined in a term sheet, which specifies the rights and obligations of both parties, such as the amount and type of funding, the ownership and control structure, the exit and liquidation preferences, and the anti-dilution and governance provisions. Valuation and terms are often subject to due diligence, valuation methods, and negotiation skills.
Help others by sharing more (125 characters min.)
- Rutvik Deepak
Valuation is important, however you may be surprised at early stages with fast growing startups, this does not get enough attention. As long as the lead investor sets a somewhat reasonable valuation, the follower, smaller and micro VCs don’t negotiate on this too much. This is because in micro stakes, for a micro fund, the exit of small equity holding can still be a fund returner.In later stages valuation plays a lot heavier of a consideration.We should still do our due diligence on valuation in its entirety. But certain VCs just want a piece of the action.
LikeLike
Celebrate
Support
Love
Insightful
Funny
17
(edited)
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
-
Think of the valuation of Uber before it went public. VCs looked at the size of the transportation market, the growth and traction Uber was experiencing, and how other startups in the 'gig economy' were valued. When it came to terms, they would've looked at things like how much control they would have, what happens if Uber gets sold, and so on.In my experience, a crucial aspect is "negotiation leverage." Sometimes, who has more bargaining power (the startup or the VC) can significantly affect the valuation and terms. For example, a startup with multiple VC offers might negotiate a higher valuation and more favourable terms.
LikeLike
Celebrate
Support
Love
Insightful
Funny
1
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
5 Exit Strategy
A fifth factor that venture capitalists plan for is the exit strategy of the startup. This means the way and timing that the venture capitalists will realize their returns from their investment in the startup. The most common exit strategies for venture capital are acquisition, initial public offering, or secondary sale. Each exit strategy has its advantages and disadvantages, depending on the market conditions, the startup's stage and performance, and the venture capitalists' preferences and expectations. Venture capitalists use various methods and sources to evaluate the exit potential of a startup, such as exit multiples, exit pipeline, exit trends, and exit scenarios.
Help others by sharing more (125 characters min.)
-
In my experience, i have seen that VCs push for a particular exit strategy that aligns more with their fund’s timeline rather than what might be best for the startup in the long term. For instance, if a VC fund is nearing the end of its life, the investors might push for a quicker exit to show returns to their investors.
LikeLike
Celebrate
Support
Love
Insightful
Funny
2
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
- Rutvik Deepak
There are both good exits and bad exits.Exit strategy helps a venture capitalist understand the paths to get their money back. The most common are acquisitions, IPO or secondary sale. There’s also the risk of the founder taking an exit opportunity too early. This can be due to an upside for them - eg a job at a larger company, but the purchase price may not provide value to the investor.We have even seen founders sell their company to focus on another side business.Exits can also be arranged to cut losses.
LikeLike
Celebrate
Support
Love
Insightful
Funny
5
(edited)
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
6 Impact and Alignment
A sixth and emerging factor that venture capitalists care about is the impact and alignment of the startup. This means the social and environmental benefits and costs that the startup generates or avoids, as well as the compatibility and fit between the startup's mission and values and the venture capitalists' vision and principles. Impact and alignment are becoming more important for venture capital, as more startups and investors are adopting a triple bottom line approach, which considers the economic, social, and environmental aspects of their activities. Venture capitalists use various frameworks and tools to assess the impact and alignment of a startup, such as impact measurement, impact reporting, impact investing, and impact alignment.
Help others by sharing more (125 characters min.)
- Rutvik Deepak
A large challenge today is reporting on true impact. The concept of “greenwashing” exists here too. Impact is growing as a highly desired startup trait for investors. Even the public stock market is trying to show that impact businesses can be growth stocks.Certain investors are focused on their impact only thesis as well.There are certain platforms that support data entry to help track this, but the next generation of embedded technology will simplify measuring this and give us accuracy. Think chips/modules in machinery in factories that measure energy usage, or resource consumption. Of course this is only an industry application and needs to spread wider, and now be built in to all verticals.
LikeLike
Celebrate
Support
Love
Insightful
Funny
7
(edited)
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
Help others by sharing more (125 characters min.)
- Rutvik Deepak
At GO Ventures, we take each investment opportunity through a unique assessment.Our qualitative assessment take as much weight as the quantitative.While going through documentation to understand the upsides are great, nothing beats speaking to the founders.A conversation with the founders tells us more about their chances of success than a pre-rehearsed pitch deck.Here we see their ability to work together and how in sync they are about the vision of their business. This is a foundational assessment as VCs need to be sure that these founders are aligned and can work together for the better part of a decade.
LikeLike
Celebrate
Support
Love
Insightful
Funny
7
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
- Lily J. Early Stage Investor
As an LP to a VC fund:- investing phase: MOIC, TVPI, % companies marked up- divesting phase: DPI, CoCAs a VC fund to a venture:- Signals of PMF (strong pipeline, sales funnel conversions, willingness to pay)- Profitability (or clear path towards that)- Capital Efficiency- Clear signals of potential exit cases
LikeLike
Celebrate
Support
Love
Insightful
Funny
5
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
Venture Capital
Venture Capital
+ Follow
Rate this article
We created this article with the help of AI. What do you think of it?
It’s great It’s not so great
Thanks for your feedback
Your feedback is private. Like or react to bring the conversation to your network.
Tell us more
Tell us why you didn’t like this article.
If you think something in this article goes against our Professional Community Policies, please let us know.
We appreciate you letting us know. Though we’re unable to respond directly, your feedback helps us improve this experience for everyone.
If you think this goes against our Professional Community Policies, please let us know.
More articles on Venture Capital
No more previous content
- Here's how you can excel in a Venture Capital career by thinking outside the box. 17 contributions
- Here's how you can identify tasks in Venture Capital that can be delegated to others. 1 contribution
- Here's how you can boost your skills and knowledge in Venture Capital through temporary and contract work. 2 contributions
- Here's how you can use emotional intelligence to create a diverse and inclusive venture capital portfolio.
- Here's how you can utilize your past experience to transition into Venture Capital. 4 contributions
- Here's how you can navigate strategic decision making for early-stage startups. 2 contributions
- Here's how you can effectively discuss your due diligence experience in a venture capital interview.
No more next content
Explore Other Skills
- Payment Systems
- Technical Analysis
- Economics
- Financial Technology
More relevant reading
- Venture Capital What is the best way to determine the time horizon for a venture capital investment?
- Venture Capital What are some common types of funding rounds in venture capital and how do they affect the term sheet?
- Entrepreneurship How can you build an inclusive and equitable venture capital network?
- Entrepreneurship What are the pros and cons of raising a bridge round versus a Series B round?