What Are VCs Looking For?
Below are the most important factors that venture capital investors consider when evaluating an investment opportunity and making decisions. These aspects can also help you determine if your business is ready to raise capital.
• Growth Potential of the Industry and Large Market Size
Venture capital investors typically expect robust growth, which is usually achievable only in thriving industries. Facing many well-capitalized competitors that started earlier can reduce your chances. The industry must have some entry barriers to prevent new competitors from easily replicating your solution. A key factor is whether the market is large enough (TAM – Total Addressable Market). A small market limits the possibility of substantial growth, which will also restrict the exit options.
• Outstanding Growth Potential
You need a growth strategy and a well-founded, bottom-up business plan for the next 4–5 years, convincingly demonstrating to investors that the investment can achieve the expected returns (e.g., 5–10-20-50x). Identifying and analyzing risks and presenting plans to mitigate them are crucial parts of this strategy.
• Proven Market Demand and Business Model, Traction
Depending on the stage and maturity of your business, you must show different levels of “proof.” At a minimum, you need evidence and initial market feedback validating your concept. In concrete terms, you should have initial customers and sales or at least one or two pilot projects to demonstrate that your concept works and customers are willing to pay for it. If you're seeking funding for international expansion, investors will expect knowledge of the target markets, a team member capable of managing this expansion, and ideally some initial results in those markets. Being a market leader makes this process significantly easier.
• Unique Competitive Advantage, USP
A clearly defined USP (unique selling proposition) or competitive advantage is a prerequisite for a successful business and venture capital investment. The competitive advantage must be real and distinguishable—generic claims like “fast,” “efficient,” or “flexible” won’t suffice. A price advantage alone is not valuable. Furthermore, the competitive advantage must be defensible and at least sustainable in the medium term.
• Exceptional, Competent Team with a Credible Track Record
One of the core principles of venture capital is that investors bet on the jockey, not the horse. The management team is scrutinized closely, and attributes like leadership experience, prior professional achievements, and commitment are essential. For early-stage venture capital investments, the quality, composition, and dynamics of the team are often decisive factors. Investors are more likely to invest in an excellent team with an average idea than in an average team with an excellent idea because the team is what drives success.
• Scalability and International Perspective
Due to their high return expectations, venture capital investors rarely believe local CEE companies can achieve the desired growth solely in their domestic market. At least a regional, ideally global model is required. When planning expansion, carefully consider which target countries to enter, why, and how you’ll serve local customers. Other business models allow you to be born global from day one. You should not optimize for the local market, for the local customer needs. A standard Series A investment typically requires a proven, scalable acquisition channel supported by data to demonstrate that a robust system exists. For example, if €1 million is injected into the business, investors should have a clear idea of how many customers and how much revenue this will generate.
• Attractive Exit Opportunity Within ~5 Years
As mentioned earlier, venture capital is inherently exit-oriented, aiming to realize returns within 4–5 years. A business ready for this “marriage” shall have a developed exit strategy (not required in very early stage). You should showcase current M&A transactions in the industry and future potential targets, explaining why your business could become an acquisition target in a few years and identifying potential buyers.
• Soft Parameters
These include all non-quantifiable factors, such as personal impressions, feelings, and “chemistry,” which can influence the investor’s decision and, in extreme cases, even derail a transaction. Remember, venture capital investment ties both parties together for years, so mutual impressions matter. Does the other party arrive punctually for meetings? Do they take long vacations? How do they behave during informal conversations? Even seemingly trivial details—such as how you ask for coffee from the assistant —can impact an investor's perception. It’s surprising how many small things can influence an investor!
How to Prepare Before Approaching VC Investors?
The further a startup progresses on its own (i.e bootstrapping) in the implementation process, the more likely it is to capture the interest of one (or even multiple) investors. It’s rare for an investor to provide hundreds of millions of euros to finence an early-stage project still in the idea phase. This isn’t due to doubts about innovation or growth but rather the risk factors associated with early-stage ventures. Some say: Ideas are nothing, execution is key.
Once a prototype is truly functional, embraced by the market, and has achieved market traction or even a leading position, the risk decreases significantly. At that point, investors are much more willing to provide substantial funding.
It’s critical to assess how to advance your project further before approaching investors. This might include validating realistic market demand and presenting needs as accurately as possible.
For businesses that have been successfully operating for several years, thorough planning of the growth strategy and establishing a clear roadmap can support investment decisions. Every company wants to close its deal as quickly as possible. Investors want to understand what’s the story they’re investing and how they’ll get returns—there will be questions! Be proactive and prepare a business plan based on metrics ad benchmarks, covering market research findings, competitor analysis, core strategy elements, sales and marketing channels, and more.
Before reaching out to investors, you should have:
- A detailed investor presentation,
- A shorter pitch deck
- Competition analysis and summary of market research and trends
- TAM estimation
- And a business plan - at the very least
What Questions Can You Expect When Approaching Investors?
If you plan to grow further with the involvement of venture capital investors, you’ll need to provide convincing answers to questions like:
- What makes your product/solution unique, and how does it stand out from competitors?
- What are the most important market trends influencing your success?
- What regulatory challenges or risks might you face?
- Is your intellectual property protected? If not, should it be, and when?
- Which country is best to launch in first, and why?
- What market players should you expect there, and what level of demand can you anticipate?
- What is the market size (TAM)?
- What are the expected customer acquisition costs (CAC), customer lifetime value (CLV), and sales conversion rates?
- Would a joint venture, a reseller network or a local office be the better solution for you?
- What costs and returns are associated with each option?
- How will your gross margin evolve throughout the years?
- What makes your offering/solution sticky?
- Can you utilize network affects? How?
- What costs and returns are associated with each option?
- Can the business deliver above-average returns as expected by investors?
- Do you have an idea about the investor’s exit? What exit value would satisfy you?
This list is far from exhaustive. However, thorough preparation can significantly enhance the credibility of your project, increasing the likelihood of a successful fundraising process!
How Long Does It Take to Find an Investor?
Each project and investor are unique, making it challenging to estimate the time required to find the right investor. Extreme cases do exist—some companies have secured investors in just a few weeks, while others have taken more than a year. Realistically, for raising venture capital , you should plan for a process lasting 6–12 months.
The more progress you make independently (collecting feedback from the market, implementing plans beyond the concept stage, entering international markets, gathering experience, etc.), the shorter the average investment timeline can be. Involving experts can also streamline and accelerate the process. Several years of expertise and experience like Absolvo’s can significantly reduce the required preparation time.
What Does the Capital Raising Process Look Like?
You can read more about the main phases of the process here >>
The Typical Conditions of VC Investment
The details of the specific collaboration are outlined in the investor's offer (indicative offer, LOI, NBO), known as the term sheet. It is unique to each project, company, and investment.
Some parts of the term sheet are standard, but many terms are negotiable - and they should be negotiated well! Whether an investor's offer is advantageous is not solely and primarily determined by the ownership stake requested or the company valuation
- contrary to what many founders or owners might initially believe. The term sheet contains numerous additional conditions that can significantly influence the overall picture, potentially even changing the perception of the offer entirely.
For most businesses, capital raising is not an everyday task, so it's completely natural that interpreting a term sheet, evaluating its conditions, and negotiating them aren't routine activities either.
Experts in capital raising can support businesses also in this area. Up-to-date expertise, knowledge of truly "standard" conditions, experience with investors, and years of professional negotiation, and transaction experience increase the likelihood of achieving a genuinely "good deal". A poorly negotiated agreement can lock both parties into years of disadvantageous and demotivating "co-suffering" instead of a fruitful collaboration.
Just to mention a few topics:
During negotiations, can we expect the investor to waive their drag-along rights? Should we fully accept their veto rights? How should we address an early exit? What can we expect regarding liquidation preferences. Will we even receive cash at the time of exit? Is a right of first refusal key for the founders? What happens if the company needs further financing? Who should be on the board? What are the relevant reserved matters for the board and/or the shareholders meeting?
So, it is beneficial to:
- discuss these questions with an experienced advisor and prepare with their guidance.
- understand the chosen investor's preferences in advance and prepare strategically.
- have an experienced team evaluate the offer provided by the investor.
How Do You Increase Your Chances with International Investors?
- It's not enough to be good; you must demonstrate competitive advantage and a unique selling proposition (USP) on an international level.
- Your revenue likely doesn’t come solely from the domestic market anymore, proving your ability to succeed in international business development and customer acquisition.
- Your team must be capable of building an international company, ideally including foreign team members.
- You plan to establish a presence in your target market (e.g., opening an office or even relocating a founder), or even better, this process is already underway.
A common pattern is that founders have lived or worked abroad, attended foreign universities, or participated in non-local accelerator programs - showing that their ability to succeed in a foreign culture and build a successful business won’t be tested using the investor’s money.
When Is Venture Capital Not the Right Fit for You?
- If during the planning phase, it becomes evident that the project or company cannot achieve annual growth of at least 30-50% (of course depending on the basis).
- If market analysis reveals that your competitive advantage is only temporarily sustainable.
- If the market is not large enough (TAM shall be above €500Mn or even 1Bn).
- If you're not willing to sell the company after 3-5-7 years.
In these cases, it’s worth reconsidering whether your idea or plan can deliver the return investors expect. As previously mentioned, securing venture capital investment is a lengthy, time-consuming process requiring significant energy.
Additionally, Avoid Seeking Investors if:
- You need external funding immediately, as the minimum expected six-month capital raising process length is a "slow solution for you."
- If you struggle with the idea of accepting investors as co-owners, feel reluctant to give up equity—even temporarily—or allow them a say in company decisions. Getting VC money inherently means the investor will become a co-owner for a specific period, so you should be onboard with that from the beginning.
- You disagree that planning growth, developing strategies, and preparing business calculations are indispensable for securing a partner or funding for your project. These strategy-related questions will undoubtedly be asked.
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