The boxes you should work to check before you pitch your business to a VC fund.
There are two types of funding you can get for your new business, smart money and dumb money. Smart money is an investment made by venture capital funds. It's called smart money because the only purpose of these funds is to make successful investments in early-stage companies. Therefore these funds have developed serious due diligence processes to determine the likelihood of success in any given venture. Dumb money, on the other hand, is everybody else that could invest in an early-stage company. By the time the company is ready for its first round of venture capital funding, the startup has made enough traction to demonstrate the likelihood of its future success. Any investment by a venture capital fund at this stage is going to be made based on careful due diligence. There is very little to do due diligence at the seed or angel Investment stages. Therefore these investments are based less on traction and probability and more on opportunity and relationship.
If you want your venture to succeed, you're better off preparing for smart money. Even if you don't need to take on venture capital, the principles that VCs use as they evaluate your business are fundamental to most successful startups. Ignore them at your own risk.
Below we have put together our complete venture funding checklist. This is not meant to cover every aspect of a VC's due diligence, but it is designed to help a startup ensure it is checking the correct boxes to ensure it can qualify for Venture funding down the road. Remember, lots of great ideas with qualified teams don't get the funding they need. Venture-capital funding is not a luck-of-the-draw process. Investors are looking for known indicators that can help them predict the future success of new ventures. They are wrong more than they are right, and most VC funds don't make impressive returns. However, they are all looking for key indicators of your business's probability of success.
The two big questions at the heart of every VC investment are listed below. Look at the Venture Funding Checklist from the perspective of answering these questions.
The right people
The right-thinking
The right structure
A quality product or service
A product or service people want
A plan to continue improving the product or service offering
A viable market
At the right time
A market that's interested in your product
Favorable competitive environment
This next section constitutes an essential part of the due diligence process, but most points listed below will not be considered heavily in the initial evaluation of the venture (except for the business model, which will need to be addressed in the pitch). However, the items below can significantly delay or even prevent a fund from investing in your venture. This list will not factor into angel investments but will matter more in subsequent rounds.
Strong Business Model
Business plan
Documentation of agreements and operations
Use of funds raised
Do the right people have the right amounts of equity
Quality legal counsel
Entity structure
Positive past investments
Valuation (although first money in will set the valuation).
Control - who has it
Availability of equity
Board
Marketing plan
Employee compensation
Little or no debt
Strong operating agreement
IP (intellectual property)
Patents
Reasonable overhead and burn rate
Hiring ability
Accounting
Strong partners
Contractors and/or manufactures
No litigation baggage
Strong Customers
The boxes you should work to check before you pitch your business to a VC fund.
There are two types of funding you can get for your new business, smart money and dumb money. Smart money is an investment made by venture capital funds. It's called smart money because the only purpose of these funds is to make successful investments in early-stage companies. Therefore these funds have developed serious due diligence processes to determine the likelihood of success in any given venture. Dumb money, on the other hand, is everybody else that could invest in an early-stage company. By the time the company is ready for its first round of venture capital funding, the startup has made enough traction to demonstrate the likelihood of its future success. Any investment by a venture capital fund at this stage is going to be made based on careful due diligence. There is very little to do due diligence at the seed or angel Investment stages. Therefore these investments are based less on traction and probability and more on opportunity and relationship.
If you want your venture to succeed, you're better off preparing for smart money. Even if you don't need to take on venture capital, the principles that VCs use as they evaluate your business are fundamental to most successful startups. Ignore them at your own risk.
Below we have put together our complete venture funding checklist. This is not meant to cover every aspect of a VC's due diligence, but it is designed to help a startup ensure it is checking the correct boxes to ensure it can qualify for Venture funding down the road. Remember, lots of great ideas with qualified teams don't get the funding they need. Venture-capital funding is not a luck-of-the-draw process. Investors are looking for known indicators that can help them predict the future success of new ventures. They are wrong more than they are right, and most VC funds don't make impressive returns. However, they are all looking for key indicators of your business's probability of success.
The two big questions at the heart of every VC investment are listed below. Look at the Venture Funding Checklist from the perspective of answering these questions.
The right people
The right-thinking
The right structure
A quality product or service
A product or service people want
A plan to continue improving the product or service offering
A viable market
At the right time
A market that's interested in your product
Favorable competitive environment
This next section constitutes an essential part of the due diligence process, but most points listed below will not be considered heavily in the initial evaluation of the venture (except for the business model, which will need to be addressed in the pitch). However, the items below can significantly delay or even prevent a fund from investing in your venture. This list will not factor into angel investments but will matter more in subsequent rounds.
Strong Business Model
Business plan
Documentation of agreements and operations
Use of funds raised
Do the right people have the right amounts of equity
Quality legal counsel
Entity structure
Positive past investments
Valuation (although first money in will set the valuation).
Control - who has it
Availability of equity
Board
Marketing plan
Employee compensation
Little or no debt
Strong operating agreement
IP (intellectual property)
Patents
Reasonable overhead and burn rate
Hiring ability
Accounting
Strong partners
Contractors and/or manufactures
No litigation baggage
Strong Customers
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