What VCs are looking for

Nenad Marovac, managing partner of venture capital firm DN Capital, throws light on what makes VCs say ‘yes’, and what management teams can expect from them when they have done so.

Despite the reduced funding levels for technology start-ups in 2009, many opportunities for investment still exist, as the recent establishment of Google’s new technology VC fund, Google Ventures, demonstrates.

In order to be successful at securing investment in an atmosphere of increased competition for a smaller pot, young companies must have certain qualities. They require an excellent product, a unique service proposition, the ability to save their customers time or money, and the potential to generate significant revenue.

VC investors will also want to see a solid team in charge of the business, made up of experienced executives who understand their market. Investors always prefer cautious entrepreneurs who are cash-flow efficient and watch their expenses. Entrepreneurs must avoid traditional errors such as hiring new talent in anticipation of contracts that have yet to be won. They must also be able to take a step back from their business and objectively asses whether anyone will really need or want their product.

Finally, these start-ups must be entering a market that is ready for significant growth. How can a start-up know when the market is ready for their product? This should be clear when they start to see dramatic growth in their revenue and reputation. For example, mobile advertising, while promising decent growth in the future, is nowhere near ready for large-scale investment. It’s too far off mass consumer adoption and this means it won’t turn a decent profit for quite a while.

There is no “magic formula” to securing VC funding. Every company that receives funding represents a calculated risk, with investors weighing up the cost, the team, the product and the market. It is important to remember that even amongst funded start-ups, 50 per cent still fail.

What start-ups should expect from VCs
High-quality VC funding should encompass much more than simple investment. Especially when working with young start-ups, the investors should provide proactive guidance at all levels of a portfolio company’s business plan. They should also:

  • Have a global network of contacts, including potential customers, channel partners, employees, Tier I US and European investors and acquirers
  • Help recruit outstanding candidates for the company’s executive team
  • Bring in new customer leads
  • Introduce their portfolio companies to new international markets (for example by cross-pollinating between Europe and the US, as DN Capital has done with companies like Datanomic, Lagan and OLX)

It’s a tough market, but companies should not be so keen to secure funding that they forget to ask how much their investors can bring to the table besides their money.

DN Capital is a pan-European investor that invests €1-10 million per company.

See also: The venture capitalists (VCs) that founders need to know about

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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