3 Things VC Firms Look for When Investing in a Startup

Jonathan Ebinger - Yodlee Incubator

Many entrepreneurs begin the fundraising process without any real idea of what investors are actually looking for. Fundraising isn’t glamorous — in fact, it’s often a slow and arduous process.

If a VC firm chooses to invest in your company, they are taking you on as their partner. Those investors aren’t just investing in your ideas, they are also investing in the people behind those ideas.

So naturally, they want to be confident about your leadership and feel like there is a strong likelihood they’ll make their money back. And unfortunately, that’s the biggest reason why most VC pitches will fail.

Things Investors Look for in Startups

If you’re hoping to be one of the few who succeeds at their fundraising goals, it helps to start thinking like an investor first. Here are three things VC firms look for before investing in a startup.

1. A market with a lot of opportunities

There are a number of industries where one or two companies seem to dominate the entire market. Most investors prefer to invest in markets with a lot of opportunity, not “winner-take-all” markets.

The financial market is a good example of a market with a lot of opportunities. There are thousands of banks and many tiers of insurance. This is good for investors because there’s no clear winner. Your business could become the winner or it could be acquired by the winner.

Investors look for industries where they don’t feel like they’re just buying a lottery ticket; there’s clear disruption to be had and clear buyers, both in the U.S. and abroad.

2. Companies that own proprietary data

Many investors look for startups that build platforms that can be a receptor of data. They have their own proprietary data that they can gain insights from.

This is very different from a company that analyzes other people’s data. Companies that own their own proprietary data have access to customers that other companies can’t see.

Many VC’s are interested in investing in companies that want to own their own risk and trust their own insights, not just act as a conduit for another business. There are many good business models but a company that owns their own data and makes decisions based on it has a bigger business opportunity.

3. Companies that don’t raise more than they need

Ultimately, as a founder, you have to keep two opposing viewpoints in mind. The first is that ten percent of your brain should be focused on fundraising at all times.

You always need to be ready to raise money. However, you also need to be aware of the fact that raising more capital than you need can hurt you in the long run.

In the early stages of your business, your valuation will be determined by the amount of money you raise. Raising money at a high valuation early on can hurt your company because it raises the expectations for what you need to achieve in order to have a successful exit.

Conclusion

As a startup, you want to look for a relationship that will be mutually beneficial for both you and any potential investors. You want to find an investor that is the right fit for your company.

So before you approach an investor, consider whether they have any knowledge about the market you are in. Do they have a history of investing in your industry or at the stage your business is currently in? Doing your homework on the investor’s funding history could save you a lot of time and energy.

And when you are just starting out, focus on raising capital but be creative where you can be. Don’t take more money than you need and focus on approaching investors who will be the right fit for your startup.

Jonathan Ebinger, General Partner, joined BlueRun Ventures in September 2000 and is based in Menlo Park. He focuses on communications, financial technology, and mobility opportunities. Watch Jonathan’s full talk at one of our Incubator bootcamps here.

If you would like to learn more about the Envestnet | Yodlee Incubator, visit our website here.

If you’re an entrepreneur with an idea to leverage financial transaction data, applications for our next cohort are now open. You can apply here.

Please provide a few details

Fill out the form below and we'll call you within 48 hours.