In the world of venture capital (VC), ideas are plentiful but fundable businesses are hard to find. Despite the perception, VCs do not fund ideas alone, no matter how solid passionate entrepreneurs believe they are. To negate risk, VCs evaluate proposals based on several characteristics, often in-line with their specific funding mandate, to bridge the huge divide between a cool idea and a fundable business.
VC funds are inundated with requests for capital to get start-up businesses to the next critical level but very few offer significantly differentiated product or service in the eyes of their target market. The tech behind the business maybe amazing but it still needs to meet the customers’ burning need and deliver greater benefit to them.
Companies with a competitive edge are appealing to investors, due to their advantage over their rivals gained through delivering greater value through price, service or product offerings. This strategic business advantage, often embedded in the technology or IP, needs to be weighed up against the barriers to entry and cost of switching to their product or service for their potential users. This positioning will help to differentiate the company giving it a higher chance of obtaining desired capital.
Concrete Market Analysis
Too many entrepreneurs lack solid numbers and research on which to base their business plans. Untested, broad assumptions and a few excel skills can instantly create a billion dollar company overnight on paper. VC funds look far more favourably at proposals that show a real, in-depth knowledge of the industry or market, backed by proper research and tested specific numbers. Preparing an accurate market and competitor analysis is a vital part of any business plan to try and secure funding.
Most South African VC funds are drawn to products and solutions with global potential and that can address a large market’s needs. It would be a mistake for entrepreneurs to restrict market insight to only the local environment — building a complete, multi-national picture demonstrates that the product has future and growth potential.
VC funds are attracted to rapidly scalable business. This is why they typically invest in businesses that are centred around technology, which can easily scale unlike most service-orientated businesses, which can only scale through hiring additional staff.
Sustainability is an important trait to have for a company seeking funding as it shows that they are managing financial and environmental risks. Businesses are attractive when they have the potential to be resilient over time and being able to endure inevitable environmental, economic, regulatory and market changes.
Secure Intellectual Property
IP in the form of software, patents etc. is an important factor for VCs as it can provide a business with a degree of a sustainable competitive advantage in their market, allowing them to protect and grow their market share and act as a deterrent to potential competitors. Well-identified and protected IP is a valuable asset; it can increase the probability of a business raising further capital and increase the sale price of a company to an acquirer or future investor.
And most importantly VCs look for entrepreneurs who they can trust, have deep domain experience, are passionate and committed to the success of the business. When you invest in a company it is critical that the VC knows they will be able to work closely and effectively with the founders of the company on a day-to-day basis. VCs need the businesses that they fund to be run and managed by determined entrepreneurs with strong vision. Where required, these entrepreneurs need to be supported by a team with the relevant skills and knowledge to drive the company in the required direction.
Adopting these principles could ultimately differentiate between a fundable and successful business model and a creative yet unsound idea.