Part 1/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part one of a twenty part series on this topic.

1. What is the market potential for your company's product or service offering(s)? What is the revenue potential for the industry, and what is its growth rate?

A VC wants to quickly ascertain whether the investment opportunity is substantial enough to pursue. What determines that? Typically, it hinges on whether or not the VC will be able to achieve a healthy return within a designated timeframe. The timeframe varies depending on the focus of the VC’s fund, which typically has a designated set of criteria. Some VCs prefer early-stage investing (e.g. a five to seven-year horizon), while others focus on later-stage opportunities (which could be just a couple of years). Generally speaking, the longer the horizon, the greater the risk and therefore the greater the required return. The return can be achieved by lowering the purchase price, which means owning a larger share of the company for the investment amount contributed, or by achieving greater appreciation. In most cases an early-stage VC will look for both.

What constitutes a healthy return? This will vary from fund-to-fund, but most VCs accept a notion that the majority of their investments in a given portfolio will fail or “muddle along.” Therefore they strike for a high return in order to compensate for the inherent risks involved with private equity investing. You can expect targeted returns of investment (ROI) to be 50 percent or more; and discount rates to be in the 20-50% range. To clear that significant hurdle, VCs look for companies with considerable market potential for their products or services (often $500 million, $1 billion or more). Investors prefer growing markets with plenty of steam still left in them. Finally, most VCs focus on specific industries or sectors, so they'll be trying to ascertain whether this deal is within their bailiwick. This last point is a critical one. Many entrepreneurs spend considerable time chasing investors who aren’t an appropriate fit for their companies. Just as you would research a customer before pitching your product or service, know the investor before soliciting an investment. In researching investors, keep in mind that there are usually specific investment criteria or attributes associated with the VC firm, the specific fund and the individual partner (Venture Funds are typically structured as partnerships; partners within the Fund generally have specific areas of focus such as certain industry verticals).

I will get to the rest of the questions in my following posts...

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here