Startup Funding: What does a Venture Capital fund look for in a startup?

Often entrepreneurs with big aspirations need to raise significant capital in order to scale up and grow their business quickly. Raising external money for a startup is a complicated endeavour.

The entrepreneur will need to meet with investors and convince them why his/her startup is a “not to miss” investment. This will include some back and forth and plenty of questions from investors challenging the entrepreneur’s beliefs and conviction about his business.

The end of this process is binary, either the start-upper ends up with a term sheet and subsequently an investment or he doesn’t.

Both outcomes have their own value and significance. In the “good scenario” the entrepreneur has a validation of his business vision so now the only thing left, is to focus on execution. In the unfortunate scenario where the start-upper can’t secure funding, one should take a step back and ask the hard questions. “Is my idea/business as good as I really think it is?”, “Am I solving a “real” problem here?”, “Was I clear enough about my vision, about where I want to go and how I will get there?”. The important thing is not to take things personally, but use the whole fundraising process as a learning experience and realize that this was just a business decision the investors had to make.

In our opinion, it is also the investors’ responsibility to provide honest and constructive feedback to the entrepreneur.

Having said that, we would like to lay down and analyze the big boxes that a startup should tick in order to be fundable at least from VentureFriends. Our view is that there are no “secret sauces” and there should be no mystery behind our decision making process. After all openness and honesty is always the best policy when it comes to building solid relationship with others.

Idea/Product: Let’s start with the idea first. VF invests only in products that solve tangible problems and pain points. We value clear and concise communication. When listening to an idea we expect to hear a concise pitch that will allow us to understand within a couple of minutes which pain point the product is solving.

We don’t invest in nice to have products while in terms of business models we love marketplaces and SaaS where we have significant expertise along with many portfolio companies to synergize with.

Team: The team is, by far, the most important criterion we consider when contemplating a new investment. Even if the idea is not 100% persuasive we will consider funding if the team is impressive.

The questions we ask ourselves are:

  • Is there a team in place that has the skills to execute and deliver? Is it a “one man” show or are there two founders with complimentary skillsets? (Btw, we have invested in both “types of teams, but it is always preferable to have more than one founder so that more people bring value to the table)
  • Is the team determined to go the extra mile, i.e. work tirelessly until they achieve their goal?
  • Is this a team that we would enjoy working with and vice versa?
  • Can the founders hire and motivate amazing people?

Obviously the answer to all the questions above should be “Yes” without the slightest shade of doubt ;)

Market: VF is not looking to invest in companies that do not cater to a market of at least 500 million euros. That market size should be the potential revenue if the company were to get 100% of market share and not the total GMV value. Eg: in a marketplace, the actual market size of a taxi hailing app is the 20% commission and not the total value of rides generated through the platform.

Obviously, the team should be able to show solid understanding of their market size and dynamics:

  • How big is the overall market currently?
  • Can we grow the market?
  • Where is the market going? Are there any dynamics shifts we expect to take place?
  • Can the market support a €20M revenue company per year?
  • What is the go to market plan? Is it realistic?

Competition: The type of questions we consider here should not be a surprise to anyone:

  • What is the existing competition?
  • What are we doing better than the current players?
  • How defendable is our position? Do we have a moat?
Overall, we are a competitive bunch of people who enjoy competing with others and have never been scared of competition, however we really love it when there is limited or no competition at all ;)

Investment required: We not only look at the milestones to be achieved with the current investment round but also focus on the total investment the company will require until it become “exitable”: Reach 10–20 million euros revenues. This exercise sets the expectations about expected returns and a big factor here is the overall risk / reward analysis accounting for the expected dilution along the way.

International Expansion: In our investment career up till now, we have been fortunate to be involved with both successful Greek startups and startups that were able to successfully scale and expand abroad. Needless to say, the latter has been a more exciting and fulfilling experience for us and this is what we are looking to replicate now with VF. We are seeking startups and teams that are willing and capable of expanding to at least 2 more markets outside Greece. This means that the team needs to be able to i) attract and retain talent abroad and ii) fundraise from foreign VCs.

Exit Opportunity: Our approach is to help create sustainable and defendable businesses. As a VC, at some point we will need to exit our position so if there is an obvious exit path that’s more than welcome, however this is not a prerequisite since we believe that solid businesses, eventually will have no problem finding their way to a lucrative exit.

In summary, VF is looking for great founders tackling with “need to have” solutions, international and significant in size problems that have not been well addressed up to now by competition.

Are you up for it? If yes, send us your deck and best of success! ;)