How to Think Like a Venture Capitalist

How to Think Like a Venture Capitalist main image

Getting a business off the ground can be tough. Start-up ventures and small companies with growth potential need a certain level of investment to get started and one route to consider is venture capitalism.

Whether you’re starting your new business for your own financial gain, or you want to make the world a little better, you need to present your business as a money maker to venture capitalists, as they’ll only invest if they believe they can achieve a sizeable return on investment.

So, how can you make sure your business proposal hits the right points to lure in investors? Well, if you’re to attract the deep pockets of venture capitalists, start by trying to think like one.

Entrepreneurs vs venture capitalists: how they think  

How is my business doing now (this quarter/year)?What are the key business metrics and future capital requirements? How big can this business really be?
My team is fantastic already. Check them out!What are the team’s current and future needs? Can the entrepreneur employ better?
How am I better from the competition today?Who are your competitors? Who could become a future competitor?
Look at my sales – my market is huge!Is the market really that big?
I think my company is worth it – you should pay ‘X’Why should I invest that much?

Let’s take a look at some of the top priorities on a VCs list. 

Positioning your company

Venture capitalists are on the lookout for strong management teams, a large potential market, and a unique product or service with a strong competitive advantage.

VCs will more than likely look for opportunities in familiar industries, with the added bonus of owning a large percentage of the company so they’re able to influence the direction.

Thinking about the market

You need to think whether the market and opportunity is big enough to yield a highly valued investment.

Are changes in the market structure or business models making room for an innovator? Most importantly, are there barriers to entry, making it difficult for competitors to copy or replicate your innovation success? You need to protect yourself from a competitor obtaining market share leadership.

Think about the opportunities you have to create revenues and margins by disrupting the existing industry, what your total available market/return is, and try to pinpoint what your revenue would be if all target customers pay what you expect them to.

When talking about the market you’re addressing, pay attention to the details. Think about who your customers will be, and make sure you can differentiate between total available market, serviceable available market, and serviceable obtainable market.

Think about your customer’s mindset

Are customers buying your product? If so, how satisfied are they? Are you taking steps to maintain and increase satisfaction where needed?

Try to connect with the average customer’s thoughts about buying and using your product.

Opportunity for customers

Do you think customers will care about your product and company? Will there be a substantial number of customers?

Will your customers be “good” customers, willing to pay for service and product features? Or are they just on the lookout for the lowest possible deal? This is important as high gross margin customers tend to influence whether companies obtain high gross margins.

Not just about financials

It’s important to spend a substantial amount of time on key business metrics, not just financials. In the early stages, financials are helpful of course, but money isn’t always the best indicator of future success.

Instead, focus your energy on chipping away at key unit economics which will be crucial to future financial success when your business grows. Examples of these include gross margins, the cost of customer acquisition, and the lifetime value of a customer.  

The portfolio strategy

One approach VCs can take is a portfolio strategy for innovation, meaning they invest in a number of ideas based on key insights into needs and opportunities.

Taking this strategy allows companies to move beyond incremental growth.

Amazon is one of many successful companies to have adopted a version of this VC mindset. They invest in risky yet exciting ideas, in the hope one product will obtain a major breakthrough.

Although there may have been some bumps along the way, it’s safe to say Amazon have excelled by taking this approach, and you don’t need to be a business behemoth to follow a similar high-stakes path.

Think about internal and external factors

Nobody wants to imagine their business failing, but it’s important you stay aware of possible downfalls or obstacles. Having a critical mindset will help you figure out how to continue to grow and expand your business.

The lowdown

Venture capitalists aren’t afraid to take risks. Although many VCs have struck it lucky, earning high returns on their investments, many have taken massive losses too. To succeed, you’ll need to trust your gut, do your research on how best to expand (or acquire) your business, and be confident with your final decision.

Niamh Ollerton, Deputy Head of Content at QS
Written by Niamh Ollerton

Niamh is Deputy Head of Content at QS (TopMBA.com; topuniversities.com), creating and editing content for an international student audience. Having gained her journalism qualification at the Press Association, London and since written for different international publications, she's now enjoying telling the stories of students, alumni, faculty, entrepreneurs and organizations from across the globe.  

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