Entrepreneur

A VC's tips on securing seed and series A financing

(Editor’s note: Carl Showalter is a general partner with Opus Capital. He submitted this story to VentureBeat.)

While the economy is finally showing signs of life, securing capital for early-stage ventures hasn’t gotten any easier- so it seems timely to let start-up owners in on the criteria by which they will be judged.

Each year our firm typically reviews more than 2,500 companies seeking seed or Series A funding and invests in between six and twelve. Here’s how we judge a young company’s viability.

First of all, we evaluate deals on three axes: The team, the market and the technology or product.

  • We want a team with domain expertise in the market space—individuals who can see the opportunities in that market before they are apparent to others and can use that vision to become early movers in the market.
  • We want the company to be targeting a market that is nascent or even nonexistent. It needs to be a market the entrepreneurs believe will, at some point, grow rapidly, creating an opportunity for the company to move faster than any incumbents.
  • The company needs to have a product with some level of defensibility – something that’s not easily replicable once the market becomes more obvious to others.

In addition to these primary criteria, there also has to be a scalable business model that can generate interesting valuation multiples over time. Having a good way to make money is not enough; a high-growth market to support it and a team and product that can take advantage of that market opportunity are essential.

The next step is to ask hard questions across these three axes. If you’re in the hunt for capital, here are some of the questions you’re likely to hear:

Team

  • Can the founding team succinctly and consistently articulate the company’s business opportunity?
  • Can they succeed in an unstructured environment? Are they comfortable with uncertainty? If the founders are from large companies, it’s helpful if they have some sort of track record in taking risks or starting something new.
  • Do they have a demonstrated ability to stay focused on the critical objectives?
  • Do they have the ability to challenge conventional wisdom and think differently? This is perhaps one of the most significant hallmarks of an outstanding entrepreneur.
  • Do they have a roadmap for the company culture? Surprisingly, many founders never consider this.
  • Do they understand the value of frugality and the need to ruthlessly prioritize spending?
  • Do they have realistic expectations of their positions in the organization and how that will evolve? In other words, are they comfortable with potentially not being a chief executive? This very issue can break up even the best of companies.
  • Is there a shared vision for the future of the company and its liquidity event? In this economic climate it’s more important than ever that company founders are focused on building a company for the long term.

Market

  • Is there a market that can grow exponentially to create an opportunity for a new entrant? “Exponentially” is key here. Solid growth may just not be fast enough to enable success.
  • Is there a scalable business model?
  • Is there a low-cost go-to-market plan relying on reasonable and realistic distribution channels? Lack of low-cost and scalable distribution is another small company killer.  Are there large partners who could help reduce the cost of customer acquisition?
  • Are there three or less startup competitors vs. many?
  • Has there been some validation of the market opportunity, whether through a pilot or beta, or through research? Actual testing or feedback on a prototype by customers is always preferred, but for systems and semiconductor companies, research may have to suffice.
  • Do they have the ability to capture the imagination of investors as to why this could be a really large market opportunity? Are they convincing as to why they could be the market leader in the space? If they can’t capture the imagination of investors, it’s unlikely they can capture significant market share with customers.

Product

  • Is it simple to articulate and understand?
  • Is there a clear value proposition about the pain point or problem it’s solving and why this product or technology will uniquely address that need?  There must be enough of a problem that customers are willing to risk buying from a startup.
  • Is there intellectual property or at least some “secret sauce” that makes it defensible? Patentable concepts are desired but not required.
  • Is the intellectual property free and clear from previous employers or others?
  • For a company selling a product, are the projected gross margins more than 50 percent?
  • Will the product be available within 12 to 18 months? Product should be in development, not just at research stage.

Despite what could still be considered a tough fundraising environment, early-stage venture capital investing is alive and well. If your start up meets the criteria outlined here, you should have no problem securing funding.


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