7 things Series A venture fund investors look for in a startup
If you are making the decision to raise venture capital for your business, you should first get familiar with what venture funds are looking for. After bootstrapping, there’s seed funding
This is our specialty. Unitus Seed Fund is a “micro vc” or “seed fund”. Our goal is to provide sufficient capital and support for our portfolio companies to make sufficient progress within about 12 months in validating their business model and preparing themselves for rapid growth. Once realized, then we work with our portfolio companies to raise a much larger, follow-on growth capital round to begin rapid scaling up of the business.
What are Series A venture fund investors looking for?
From our experience, here are some of the key things that Series A (typically $1+ million round size) venture investors are looking for:
1. The right people. Do you and your team have the skillsets, energy, perseverance, passion, networks, and self-awareness to build the business for the next at least 2-3 years? If you are have a key role not covered, how will you fill it? Also, do you have the right advisors and board members?
2. Big accessible market. Series A investor are looking for a business with a BIG market potential. Know your TAM (total accessible market) and how to explain it to your investor. Be thoughtful and under-estimate your market to demonstrate that you understand who your core customer is. It is often helpful to describe your customer targets in terms of concentric circles — target customer, next ring of customers, etc.
3. Micro-market leadership. Have you demonstrated micro-market dominance? That is, have you shown on a small scale with a focus on a niche/targeted customer base that you can quickly become a leader? You see, this demonstrates that you can generate loyal customers — a critical factor. These are the early adopters. Investors often believe that if you can do that with one targeted group that you’ve got a reasonable chance of doing that with more and larger groups.
4. Promising unit economics. Focus on unit economics, not overall business level economics, achieved to date. The question is, are your unit economics good enough for you to be ready to start scaling rapidly? Topics to cover include … What does it cost to acquire a customer? How is your customer acquisition approach scalable? What is your current life-time-value (LTV) of customers? How has this improved? What does it cost you to retain a customer? Where do you think you can see the unit economics getting to? What are you unsure of? The more you talk about your insights on unit economics, the more engaged a venture investor will be in your discussion.
5. Systems ready to support efficient scaling. Do you have the right technologies in place (or at least piloted)? Do you have competent business unit-level leadership in place and a validated system for training new leadership as you grow? Do you have the right policies and procedures to keep quality high and prevent fraud and abuse?
6. Secret sauce. What is your special sustainable differentiator which will enable your business to continue to thrive once competitors take notice of your success? Investors will often ask, “What is your IP (intellectual property)?” In places like India with relatively weak IP protection enforcement options, patents are interesting but not valued highly by most investors. Sometimes it is better to not apply for a patent as this exposes your secrets.
7. Partnerships. It is a big plus if you have meaningful strategic partnership(s) in place with larger and well-respected firms. This is strong additional validation and allows you to be more leveraged in your use of resources — particularly as a small company. Reducing execution risk is always valued by investors.
About the guest author
Dave Richards is an experienced entrepreneur, executive and global early-stage investor. Dave has been part of the Unitus Group since 2005, helping to lead efforts to select and invest in BoP entrepreneurs in many developing countries. He led the Unitus Labs incubator for 2 years including the successful research and spinout of both Unitus Impact (livelihoods venture fund) and Unitus Seed Fund. Previously, Dave developed multiple high-growth technology businesses at RealNetworks, Sybase and Symantec from startup to multiple hundred million dollar global enterprises. He also is a partner with Social Venture Partners Seattle and leads the Social Innovation Fast Pitch startup angel fund. Read more about Dave.