Quora Answer: What Do Venture Capitalists Look for in Startups to Grant Them Seed Funding?

The following is my answer to a Quora question: “What do venture capitalists look for in startups to grant them seed funding?” 

There are three things they look at: the problem, the company, and the people.  If they are putting money into a startup, they are betting that it will provide a return that ranges from 1,000% to over 10,000% upon exit. 

The company must be addressing a need in the market.  That need must be in an area that is either under-served, or unrealised.  It is preferable that the need is in the grey market.  The grey market refers to any market where people never realised there was a need until the company came along to offer it.  An example of the grey market would be ride hailing.  Until Uber came along, no one realised how convenient and ubiquitous it would be hire private vehicles through an application to bring us from one place to another.  This is what we also term the blue ocean market.  A company that offers something that is already on the market, even if it is marginally better, is unlikely to interest such an investor because due to the saturation of the market, it would be unlikely that they would achieve the sought after returns upon exit. 

They then look at the company.  Here, we are talking about the structure.  This includes an examination of the capitalisation table, any encumbrances, the stakeholders, ownership of patents and technology, financial projections, and proposed exists. Except for complications with the capitalisation table, which may complicate further fundraising, an investor may be lenient with the rest since they are likely to have their preferred mentors to be embedded with the team to help them along. 

Finally, and this is the most important, they look at the people.  Ultimately, venture capitalists recognise that they are investing in the people behind the idea, not the idea itself.  Someone may have a brilliant idea, and still be inept, or worse, lack integrity.  The wrong leadership, unethical behaviour, or risky behaviour can tank a promising company.  If the investor is not confident or comfortable with the people behind the idea, they will likely decline.