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Want Venture Capital? Here Are 10 Must-Haves

By Geri Stengel

Forbes - November 20, 2013

Think you want to raise venture capital? You’d better be prepared to deliver a pretty big return on investment to VCs. Before you waste your time and that of the VC by asking for a meeting, make sure your business can leap the bar set by VCs.

Here’s 10 characteristics your company must have to make that jump.

1.) Target a large, lucrative market
Mona Bijoor, of JOOR, raised $20.5 million by streamlining buying between brands and retailers for one of the largest markets in the world – the $350 billion luxury fashion market.”

To attract VCs, your market needs to be at least $1 billion, said Kathleen Utecht, an entrepreneur and investor. She is currently Entrepreneur in Residence at Comcast Ventures where she sources and identifies new investment opportunities and conducts diligence on potential investments. If your market is tens or even hundreds of millions of dollars, think angels.

2.) Address a big market opportunity
Lynn LeBlanc, of HotLink, raised $10 mllion by developing game-changing technology that makes it easy for tech, financial services, telecommunications, and Internet search firms, among others, to mix and match virtual infrastructure for their data centers.

Are you solving a must-have need? Is your product or service the solution to a major pain point in your industry? Are you innovative and a market disruptor? Do you have the potential of being a $100 million company that captures a significant share of the market? If you say “no” to these questions, you should think twice about asking for venture capital.

3.) Produce a maximum return on investment
When you’re thinking about whether your company should look for a venture capital, consider its growth potential. VCs are looking for companies with the potential to grow to $100 million in revenue and beyond. They are not looking to invest in lifestyle businesses that don’t have the potential to grow beyond $10 million in annual sales. “[VCs are] not typically looking to invest in ‘lifestyle’ businesses or businesses that won’t be able to provide some sort of eventual outsized exit at scale, whether that’s an IPO, M&A event, etc.,” said Renee Park, who is an associate at High Peaks Venture Partners, an early stage venture capital fund. Previously she was an associate at 37 Angels, which trains women to be angel investors. “The return profile VCs aim for depends on the stage of the fund, the size of the fund, and the general investment thesis. Not every exit needs to be a homerun IPO for VCs to be happy with the outcome. Sizeable M&A events equal happy investors and entrepreneurs and employees as well,” continued Park.

4.) Need outside money to scale
If you need money to grow big, venture capital may be for you. Bijoor, LeBlanc, Erica Bell and Katie Finnegan of Hukkster and Paula Long of DataGravity all needed money to scale. However, “if you can grow quickly and maintain profitability, you may want to rethink giving up equity to an outside investor,” said Utecht. Liz Elting grew TransPerfect, a translation service and discovery service for law firms, healthcare companies, and other businesses in which speed and accuracy are critical, to $350 million without venture capital.

5.) Build product traction
You have to be well past the idea-on-a-napkin phase. You have to demonstrate some degree of traction for your product or service among customers. Build a Minimum Viable Product. An MVP has just enough features to allow a valid test of the product by early adopters. Early adopters tend to be more forgiving, more likely to give feedback, and able to grasp a product vision from an early version of the product. That MVP doesn’t have to be fancy. Using Excel and manual laborBell and Finnegan of Hukkster demonstrated traction for an app that lets shoppers know when the goods they want are available for less money.

6.) Differentiate yourself from your competition
Some would-be entrepreneurs have the hubris to think that they have no competition. Even if you have a disruptive new product, you’re competing against the entrenched way of doing things. Failing to acknowledge the competition and not knowing who your two to three biggest competitors are makes you look silly. VCs also want to know how you will sustain your competitive edge.

7.) Put together a top-notch team
The team Long of DataGravity, put together has a track record that includes developing a high-quality technology product and a sales and marketing machine. So good was the team that the company sold for $1.4 billion. The strength of the team is absolutely critical to a VC, said Anu Duggal, a serial entrepreneur and investor. She is the founder of F Cubed (Female Founders Fund), a seed-stage fund investing in technology businesses founded by women. VCs invest in people. VCs know the idea is going to morph. They want to be sure the team has the ability to do this.

8.) Be prepared to give up a board seat
Many, but not all VCs will require being on your board. You need to recognize this is a possibility. Some VCs actually prefer not to be on your board, said Park. Other VCs simply want to have an observer at board meetings so they know what’s going on in the company, she continued. Know your preferred style and that of the VCs you’re speaking with.

9.) Connect personally
You’re going to be spending a lot of time with your VC so getting along is crucial. Chemistry means that you like, trust, and are in sync with each other. You have to personally connect and have similar expectations, vision, and objectives for the company, said Duggal.

10.) Be coachable
While you don’t have to take all the advice you’re given, you need to be able to take feedback and digest it, to weigh whether it’s right for your company. Springboard Enterprises provides leadership training, access to capital, and connections to accelerate the growth of women-led companies. Its companies have an 83% fundraising success rate and have raised $5.6 billion. Springboard looks for women who are coachable, women who can handle tough feedback.

If you can check all the boxes for VC’s must-haves, venture capital may be right for your company. How will you get ready for that first meeting?