Negotiations with investors

9 Things Venture Capitalists Evaluate When Deciding to Invest in Your Startup

Launching a business can be expensive, and even the most enthusiastic entrepreneur can only do so much on a shoestring budget before they hit a ceiling.  Sufficient capital will be required to maintain a stable cash flow and see real growth in the business.

For all entrepreneurs except those lucky enough to be independently wealthy, solid financial backing is a necessity. Of course, gaining such an investment is easier said than done. Due to the risks involved, investors are usually shrewd, and competition for their funding is high.

As such, they seek assurance from a range of qualitative factors to ensure they will see a return on their investment. A common myth among the startup community is that backing by venture capitalists makes up the majority of funding resources startups access. In truth, the advent of VC funding is much rarer, representing less than 1% of funding accessing by startups.

With competition so cut-throat and funding so scarce, entrepreneurs must add in significant work to ensure they are part of that “less than 1%”. To make things easier for you here is a list of aspects that VCs look for when choosing an investment.

Understanding of the market

Investors look for dynamic startups that are pragmatically able to cater to an unmet need in the market. In order to facilitate that, the founder should have a thorough understanding of the consumer demand of the market.

A venture capitalist will want to know whether or not you understand the needs and preferences of consumers in your target market. Investors will evaluate how the startup gauges the qualitative and quantitative aspects of its audience, and the requirements to cater to those aspects. Highlight the specific gap in the market and how your startup can create a niche for itself.

If you claim to have a considerable understanding of audience needs, you will have to evidence this claim. Put simply, your investors would like to see proof that your offering is able to provide ‘real value’ to your target customers.

Uniqueness of the business

One of the first things you will be asked is: “What’s new about your offering?” or “What special advantage do you offer in comparison to your competitors?” You must be able to answer these questions accurately and confidently.

The market you wish to enter is likely saturated companies with similar products or services, and competition will be fierce. A similarly high number of startups are vying for the funding of venture capitalists. Amid such a crowd, having a significant USP will make you stand out.

Consumers in every market, irrespective of the industry, are intrigued by new or innovative concepts. This is where focusing on donor retention becomes equally important. High donor retention rates signify a loyal customer base which can indicate a unique value proposition that resonates strongly with them. Therefore, if your startup has a unique strategy in place for donor retention, it can present an additional competitive advantage in terms of customer loyalty and recurring revenue.

Having a USP when entering the market will attract those early adopters that represent important potential customers in the early stages of a business. If your business produces something that has not yet reached saturation in the market, you will increase your chance of gaining funding.

Investors need to see but also understand the products’ characteristics. They will look at the proprietary features, and how this creates a competitive advantage, evaluating those aspects which distinguish your product from your competitors. This could mean exclusive licenses, patented technology, unique marketing plans, and so on. Make sure to be able to provide evidence of your claims, in order to justify the uniqueness of your startup. 

An innovative outlook

To investors, innovation represents the driving force behind long-term sustainable growth for the company. Companies that fail to innovate fail to thrive. A focus on innovation implies that a business has the ability to maintain market share over time as the market evolves, and this translates to a continuing return on investment for venture capitalists.

Innovation can also be a method of securing a competitive advantage in the market. The profit potential is always higher for a startup that can continue to stand out in the competition. Thus, venture capitalists you approach will pay special attention to an innovative approach taken by your company.

Personality and passion of the founder

While an innovative approach and unique idea are significant in attracting the attention of investors, the passion and personality of the founder are equally crucial. A startup may be based on a brilliant idea, but if the founder doesn’t have the zeal to work on the project, the startup is unlikely to succeed. Wise investors recognize this and closely monitor the mindset and character of the founder before making an investment. 

The early days of a startup are demanding on the founder, in terms of time and energy. If the entrepreneur is not passionate, they will soon lose motivation. They will also be unable to motivate their employees with sincerity and commitment. Passion is vital during periods of difficulty, and it’s that dynamic proactive attitude that investors believe in.

Your business plan

Every business needs to draft a well-articulated business plan to act as a guide towards its specific goals. A venture capitalist will evaluate the business plan of a startup meticulously to assess the profit potential and prospect of the business. Things that a potential investor is seeking in a business plan are:

  • The intended market and supporting data to prove why the market is appropriate for your business
  • Realistic financial projections and supporting data
  • Competitive analysis of your product or service
  • Sales channels for the business and reasoning for their choices
  • Marketing strategies to be implemented and the reasoning behind such strategies
  • Projected timeline regarding profit
  • Possible challenges to be faced by your business and solutions to mitigate risk
  • Always be market-oriented. To win over investors, highlight your expertise in the target market and present a solid plan for your business structure, particularly if expanding to new markets like the US. It’s important to demonstrate knowledge of different business entities, such as a limited liability company.

A sound business plan can make or break your chances of gaining funding, as it highlights the relative experience of an entrepreneur. The presence of the above elements is essential in order for investors to take your startup seriously.

Financial outlook

A wise investor will want to be sure that his money is invested with a financially responsible entrepreneur. Investments are only made with the aim of generating a return on investment. If a business owner is unable to manage their financial liabilities with due diligence they may mismanage the investment as well. 

Venture capitalists will, therefore, request your financial numbers. You will have to prove yourself financially stable. Investors want the progress you’ve made with the limited capital you currently have. If you claim to hold a solid financial track record, provide sufficient evidence. Prepare to be asked about your budgeting principles, expense areas, debt:income ratio and other such relevant aspects. 

If your company has experienced a period of financial woes, be transparent. Investors prefer to invest in entrepreneurs who they can trust, and besides, it is more than likely that the investors will find out sooner or later anyway.

The startup team

Your workforce is largely determinant of the success of the business, as it is they who are responsible for executing your business model. The right team of experienced professionals is a reliable predictor of growth, but the recruitment of employees with poorly matched skills and expertise is unlikely to make the startup a success.

It can’t be stressed enough about the importance of hiring talented individuals where the company can confidently stand behind. If you are a small technology startup, it is crucial that your engineers and programmers are not only experienced, but their skills match exactly what is needed for further product development. 

Time and time again, businesses have risen and fallen due to the fact that they made the ill-informed choice of depending on technology partners that have failed to produce what is needed to evolve the product and ultimately, the company. One of the biggest challenges, especially within the startup industry, is finding the right people to join the team while both keeping the search timeframe short, while moving the business forward. 

As such, venture capitalists will evaluate your workforce before making an investment decision. They will require evidence of the credentials and experience of your team members and will consider how well your team’s experience and skills match with what is needed. You may have to provide academic certificates and proof of professional experience for your team members before the investors. Proving your startup is backed by an intelligent, capable, dynamic, hardworking, and committed team is attractive in the eyes of investors.


Investors may ask you what business goals have been met so far, in an attempt to understand the startups growth rate. This gives them an indication of the potential for future growth.

The past performance of the business signals whether the company is likely to be successful, and therefore profitable, in the future. Experienced investors will also be able to find potential opportunities and risks for the business from this information.

By highlighting milestones achieved thus far, you can validate the business model as one with potential for a large return on investment. Detail previous sales figures, and compare them with projected sales to assure the investors that you have been realistic.

Exit strategy

When approaching investors it is important to acknowledge the risks associated with the investment from the venture capitalists’ point of view. Up to 90% of startups fail, and you must assure them that you intend to minimize this risk. An effective exit strategy should be laid out to ease their discomfort with this risk.

By highlighting an exit strategy or some other contingency to safeguard the investor’s interests, you are displaying that you are able to be cooperative and this is a positive sign for the potential investor.

Final words

Investors want to be sure that they are able to make the most informed decision possible when selecting a startup to invest in. If you wish to gain the capital required to take your business to the next stage of growth, you must be able to provide them with evidence that yours is the smartest investment.

Venture capitalists will want to know how you intend to utilize their capital, and how wisely. You will have to prove to them that your business plan is well thought out and that you are capable of achieving the key milestones you claim to be able to.

Ultimately, capital investment is an exercise in generating a return on investment, and the criteria upon which you are being evaluated are measures of the likelihood that your startup will be a success. Given that fact, it may be wise to consider these evaluations yourself before seeking further investment.

Written by

Andy is a UK native, living and studying in Copenhagen since 2017. Having lived as an expat most of his adult life, Andy has an interest in geopolitics and intercultural communications. He is currently studying a Bachelors degree in Marketing and International Sales and works as a content creator at Valuer, a company connecting resource strong corporates and enterprises with agile startups.

View all articles

Tell us about your plans on a brief intro call and we’ll start the matching process.

Hire developers