Five things a VC will ask when vetting a new company

When vetting any start-up for potential investment, there are several key things venture capitalists and angel investors alike will look at when making their decision. If possible, have as many of these questions answered – better yet, in some sort of investor deck – before you meet with your first potential investor, and you’ll have a much easier time raising the money you need.

1) How truly talented, determined, and cohesive is the founding team?  

All start-ups will go through challenges as they grow, and the strength and savvy of the founding team will determine if the company makes it through the rough patches.

While it’s important to have a team of rockstars, it’s more important the founding team is focused on building the best product possible. Passion, or lack thereof, can be a potential flag for any investor. (I delve deeper into passion later in this piece.)

This passion and interest will draw in equally passionate advisors and board members, which are also critical to a company’s early growth.

2) Does the company have truly evangelical customers?

To bring a new technology to market, every start-up needs early adopters who are willing to take a chance on a small, unproven company. And then they must be turned into evangelists.

This requires not only countless hours of research and relationship building, but also a willingness to incorporate product and business model suggestions on the go, if needed. This will show customers an ability to think and act critically, and get them excited about working with you.

Finally, customers must love the results they see and be willing to help spread the word to others in their business and personal networks. It’s estimated that more than 600,000 businesses are started in the U.S. year; you need to prove to your customers they should be excited about you.

3) What part of the start-up’s offering is truly unique?

There are more tech start-ups out there than ever before, and most markets are now very crowded. Thus, each start-up needs some defensible “special sauce” that will allow it to carve out a leadership position in a part of the market. This could be experience, technology, passion or something else entirely.

This thinking also applies to a start-up’s mission as well. At G2 Crowd, we have a platform that changes the technology industry by pushing it to be more transparent and buyer-centric. This is a mission the entire team – everyone from the founders to new employees – is passionate about. We’re passionate in our sales calls, our board meetings and even our team outings. You can’t fake passion, and we’ve gotten feedback from many of the vendors and users on our site that it’s clear we love what we’re doing.

4) Are the start-up’s early customers renewing, making add-on purchases and spreading the word?

Early adopters are often willing to try new things. Thus, signing up the first five to 10 customers might not be all that difficult. The real proof of value, though, is whether these customers renew the service offering, and/or start to buy more from the start-up.

Start-ups must have a core of loyal customers that are willing to do the following:

  • try new products
  • provide feedback on existing products and pricing strategies
  • give recommendations for new products or functionality, and tell you what they would pay for them
  • provide customer testimonials and other partner content
  • spread the word to other potential customers

One way to do this is to create a “customer advisory council” of sorts; get your key customers together every so often to share your results, your roadmap and general knowledge. Not only does it provide valuable face time, but you might generate some additional ideas for your own efforts along the way.

5) Does the company have a vision and plan to get to a leadership position in a big market?

In this lean start-up world, many start-ups start by solving a small problem uniquely well. While this might be a great way to find initial traction and create your first revenue, in order to build a big business, your start-up needs to define a clear opportunity and have a distinct vision and path to building a truly big business.

To attract most venture investors, your business will need to address not only a definite pain point, but a billion dollar-plus market opportunity as well.

Photo courtesy of Shutterstock

Godard Abel is a proven entrepreneur who is currently involved in building two venture-backed companies. He is Co-founder/Chairman of G2 Crowd, and the CEO of SteelBrick; together they have raised over $15 million in venture funding.  Previously, Godard built SaaS leader BigMachines from scratch into a company that Oracle purchased in 2013 for over $400 million.