When Angels and Venture Capitalists look to invest in early-stage companies, they are taking a huge risk in the hopes of getting the golden ticket. Seed and early-stage startups are still figuring out their business model, focusing on product development, implementing a sales strategy, and figuring out how to acquire customers. These plans are pulled out from thin air, with nothing substantial to work with. What their value proposition or business description is at this stage will, more than likely, change within the year. So, the question remains - what criteria do Angel's and Venture Capitalists look for when investing in early-stage startups?
What criteria do Angel's and Venture Capitalists look for when investing in early-stage startups?
There are a few common criteria that investors are looking for in their startups are:
- Scalability of the startup
- Attractiveness to potential acquisitions
- Exit opportunities
- Customer validation
- Total addressable market and go-to-market strategy
- Alignment between the startup and the fund's strategy
- And of course, the management team
However, looking at the list of factors that go through the minds of investors, the information required to assess the opportunity is seldom there. When screening deals, investors make decisions with information that is likely to be one-third of the criteria that should be met. This can lead to investing in MySpace over Facebook or Lycos instead of Google. Yet, early-stage investors continue to follow the rabbit hole of making investment decisions on opportunities without seeing the full picture.
According to the Startup Genome Project, over 90% of startups fail. For startups that have received venture capital funding, 75% have failed on average. According to PitchBook, in 2018 alone, US Venture Capital funding reached $130.9 Billion. Applying the historic average to 2018's investment numbers, $98.2 Billion will go to waste. Although external factors are leading to the failure of a majority of startups, venture capital investors need to make better investment decisions. They need to make the correct decisions at the earliest stage with structured data, not based on the pitch deck and other qualitative factors. So, how can investors break out of the broken cycle on how the deal flow process is being done today?
How technology can help
Powerful data platforms have taken us one step closer to finding the right investment opportunities. Companies such as PitchBook, CB Insights, and CrunchBase have pulled important data to give investors an overview of the startup that help with later stage investments. However, investors have the ability to leverage other platforms available to easily gather vital non-public information that cannot be found on these platforms. Currently, investors gather this information via endless email threads, phone calls, and potentially meetings once an opportunity is worthy of further exploration. However, that still leaves investors in a predicament of filtering worthy opportunities with vital information missing.
For inbound leads, many investors have a “Contact us” page or a webform where entrepreneurs can submit their business opportunity. From that point forward, investors must cypher through the attached message and/or business plan to assess if the opportunity is right for them. Whether investors spend quality time viewing inbound leads via a typical webform layout is another discussion, but what if it becomes easier for investors to gather structured data.
Investors can leverage webforms by customizing the fields to gather structured data for their inbound leads. This allows the investor to have actionable data in a structured format to be able to compare opportunities. This will allow the investor to get through more deals with quality information, having to spend less time trying to make sense of business plans that have different metrics and comparables.
Once an investor moves forward with a business opportunity, the in-depth research and due diligence begins. This may involve finding comparable companies to evaluate the market or reaching out to the entrepreneurs with follow-up questions, which then leads to more follow-up questions, and so on, eventually gathering enough information to deem the opportunity worthy of getting to the next stage. That process is time consuming as well, however, leveraging technology makes it easier. Whether you use a collaboration tool or online form (I.e. Typeform), investors can gather this data at a quicker speed.
At Zapflow, getting investors actionable data with less effort is one of our core values. Along the topics discussed above, Zapflow allows investors to have unlimited custom webforms where they can select the structured data they want for inbound leads. Whether investors are focused on qualitative or quantitative data, or a mix of both, every inbound opportunity will have actionable data to base decisions off of. Once an opportunity moves to the next stage (or within the same stage), investors have the opportunity to invite the CXO of the startup as a guest user, allowing the entrepreneur to fill in missing information in a structure format. This eliminates time wasted and clutter from the decision-making process, while empowering the investor with actionable data to base investment decisions off of.
It’s time for investors to leverage the power of technology to help them make better decisions, based on better data, at an even faster pace.