Venture capital, or VC for short, is a useful and powerful financing method, but it’s not well-suited for every business. VC is geared toward companies that are designed to grow quickly and have high startup costs. To give your business the best chance of scoring venture capital funding, you need a disruptive idea that is ideally in an industry VCs tend to invest in heavily. It also helps to have an impressive management team.
This article will help you define if your company has the right elements to be considered for VC funding. By evaluating your business as well as the industry in which you operate, you can determine if VC is the best financing option for you.
What kind of companies score venture capital funding?
High-growth, industry-disrupting companies
Venture capital financing focuses on companies that have the potential to grow quickly and disrupt a particular market through product innovation, with an end goal of a successful IPO or acquisition.
The buzzword “disruptive innovation” was coined by Harvard Business School Professor Clayton Christensen. It’s “the process by which a smaller company with limited resources is able to launch a product or service that displaces established competitors”.
Examples of industry-disrupting companies include Airbnb in the hotel industry and Uber in the transportation industry.
Fun fact: Using the word “disrupt” in connection with a business idea seems to influence investors. An informal study of 918 startups in Israel showed that businesses that emphasised the disruptive nature of their offering increased their chances of receiving first round funding by 22%, though the amounts raised decreased by 24%.
CNBC’s list of the top 50 disruptors for 2023 – including the Australian graphic design startup Canva – gives you a good idea of the sort of high-growth, industry-shifting business models that entice VCs.
Companies with high startup costs
VC is well-suited for early-stage companies with substantial startup costs that need funds to grow operations and scale the business. Many small businesses–like mum-and-dad businesses, or those running out of the proverbial garage with intentions to stay small–can often start with just a few thousand dollars. Venture capital, however, is intended for companies that need hundreds of thousands or millions of dollars to get off the ground.
For reference, the median size of seed-round deals in Asia was $1.5 million in 2022, according to the KPMG’s Venture Pulse Report.
Venture capital is often the ideal financing source for companies that are capital-intensive, or have large upfront operational costs but not the collateral to secure funding from traditional sources like banks. VC fills a void in the investing market by offering funds for many capital-intensive industries such as software, telecommunications, automotive, media or consumer products.
Which industries receive the most venture capital funding?
In venture capital, not all industries are equal.
“The myth is that VC invests in good people and good ideas,” funding expert Bob Zider wrote in a 1998 article for the Harvard Business Review. “The reality is that they invest in good industries.”
Venture capital funds in JAPAC have increased their focus on HealthTech and EdTech companies of late. The founder and Managing Partner of Australian VC firm OneVentures, Dr Michelle Deaker, believes the current climate could lead to enormous creativity across healthcare, AI, personalised medicine, the metaverse and supply chain and logistics disruption.
While a large portion of VC funding is directed at specific industries, that doesn’t mean you should abandon ship if your company doesn’t belong to one of them. You can still get venture capital funding. However, it’s important to know what you’re up against.
How baked does my idea or business have to be?
It’s very rare to get a VC excited on a pitch deck alone. In most cases, the VC wants to see initial progress, such as a founding team and a minimum viable product (MVP). And the farther along, the better.
Whenever possible, come to the table with a few large customers, testimonials and a working prototype. Tangible progress will go a long way in establishing trust and interest from the VC community.
You should also evaluate your business idea, model and team with questions that include:
- Is your product different from any other on the market?
- Does it serve a unique need within a large, untapped customer segment?
- Can your business model scale, growing larger to support an increase in load, be it customers, transactions or revenue?
- Is your management team uniquely positioned to understand the customer pinch point and capable of spurring company growth?
If you answered “yes” to each of the questions above, then it’s likely your company will be attractive to VCs.
If you answered “yes” to each of the questions above, then it’s likely your company will be attractive to VCs.
Singapore telehealth startup Doctor Anywhere fit the criteria described above when it secured VC funding.
Doctor Anywhere provides video consults with licensed doctors through its app – a much needed departure from travelling to face-to-face appointments only to waste a further half an hour twiddling your thumbs in the waiting room.
The app appeals to a large group of individuals who would previously have had to take time off work (or arrange child care) to attend a face-to-face appointment, or would simply like to see a doctor from the comfort of their own home. Unsurprisingly, the business was ranked the third fastest-growing company in Singapore in 2023, and the app now has 2.5 million users across six countries in Southeast Asia.
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How important are my company’s founders?
VCs look closely at company management in regard to their skill set, past experiences and even where they went to school.
The management team
A strong management team is frequently one of the key factors a VC will look at when considering whether to invest in a startup. For example, Anis Uzzaman, general partner and CEO of Pegasus Tech Ventures, claims that a smart, creative management team is perhaps the most important element in his decision-making process when it comes to deciding on a new investment.
As noted by Investopedia, management is “by far” the most important factor that investors take into consideration. VCs tend to look for management teams that can demonstrate an ability to execute on a business plan, first and foremost. Secondary factors include passion, entrepreneurial experience and teamwork.
Some of the other factors VCs look for when working out whether to invest in a startup is the personal experience among the founders and management team members of the problem they are trying to solve with the products or services offered by their startup, according to the Australian Financial Review.
As per the Australian Financial Review, Jackie Vullinghs, partner at Australian VC firm AirTree, endeavours to understand, in detail, the experience and motivations of the founding management team at a startup, particularly the unique insight that led them to start the company.
Finding personalities that fit
Wei Sheng Neo from Singapore VC firm, Qualgro, asks himself a question that many of his peers ask before making a decision: “Is this a team we can work with for years to come?”. He explains “teams that are cohesive and passionate about their cause are more likely to rise to the challenge than those who have simply spotted a good opportunity."
Likewise, Nick Croker, partner at Australia’s Blackbird Ventures, pays particular attention to how he thinks he’d get along with a startup’s founder and team over the course of a long-term journey together.
“The most critical part of the decision happens in your heart – do you love this company? Do you want to go on a 10-year journey with this founder? That is more art than science,” he notes in the Australian Financial Review.
The long-term nature of VC deals makes relationships important, especially as VC partners often take board seats on portfolio companies and offer ongoing strategic guidance.
Venture capitalists also look for founders that are genuine in their goals and are willing to be flexible in their startup journey as they will likely have to take on a broad range of roles.
The bottom line
Let’s review: To receive venture capital funding …
- Develop a disruptive idea, in a
- hot industry, with
- the best possible team.
Getting funded is more art than science, and not everyone who wants venture capital financing gets it. So give yourself an advantage against the competition. Develop scalable, disruptive businesses that can grow quickly, choose industries that VCs are keen to invest in, and build management teams that inspire investor confidence in the company’s ability to succeed.
