Why do investors allocate funds, and how can you ensure they choose to invest in your startup?

DUAMENTES experts guide startup founders through the motivations of venture funds and explore strategies to influence them.

To grasp why VC firms invest or skip, it is helpful to start by looking at their goals. Besides understanding their setup, it is important to know where venture funds globally get their money and what they are aiming to achieve. Typically, venture funds secure their funding from various channels like individual investors, private companies, institutional investors, government funds, and family funds. VCs do not receive investments effortlessly – they must actively pitch to convince investors to choose their fund. The primary goal of a venture fund is to attract fresh investments and illustrate how these funds will generate a profitable return. How to meet this VC’s goal? To align with the fund's primary activity and meet the goal of securing VC support, we recommend integrating a business component into your strategic plan. According to experts, at various startup stages, startups may not have this data readily available, or you are uncertain about the final form of the product, it is important to create and present a business and financial model. This shows that, even in the early stages, you are actively considering how an investor can profit.

Business metrics  

Venture capital firms examine various aspects to better understand a company's potential for success, its ability to navigate challenges, and the likelihood of generating returns on its investment. 

Here are some aspects that VCs examine when considering an investment:

  • VCs thoroughly analyse the competitive landscape with startup’s both direct and indirect competitors to identify potential risks and opportunities. For instance, crypto startups in emerging markets may face the inherent risk of regulatory uncertainty and evolving governmental policies, which can impact their operations and market acceptance
  • Evaluating global market potential involves with not only the size of the market but also its growth rate and market penetration rate. VCs look for businesses that can tap into both international and local markets and navigate cultural and regulatory differences
  • A robust business model is essential for sustainable success. VCs look at the revenue streams, cost structure, and overall viability of the business model to ensure it is resilient and adaptable to market changes. For instance, DUAMENTES experts supported Sleep8 during its launch in UK and conducted studies on market and consumer preferences to identify the best business model. Experts gained insights about the Sleep8 all-in-one sleep platform through market segmentation, profiling exercises, and in-depth analysis of customer behaviours. Initially aiming for B2C, the company transitioned to a B2B2C strategy, choosing to sell through sleep experts (somnologists) recruited by HR teams in corporations
  • Unit economics, including factors like customer acquisition cost (CAC) and lifetime value (LTV), are critical indicators of a company's financial health at a granular level. Positive unit economics contribute to long-term profitability
  • The go-to-market strategy with the company plans to reach and acquire customers. VCs assess the effectiveness of this strategy, considering factors such as marketing channels, distribution methods, and customer engagement strategy
  • Audience segmentation and analytics are connected to business metrics that are important for VCs. Different customer profile types require distinct approaches, considering unique value propositions, marketing channels, and sales channels

 Business vs product 

VCs look not only at the idea of a specific product or the motivation of founders to pursue a particular project but also at the overall business situation. Still, many founders place disproportionate emphasis on the product and technical features of their solution, unless you are a superstar-founder, then you might receive funding based on past accomplishments alone. While founders are naturally passionate about their products and innovations, VCs, in their role as financial backers, prioritise business metrics that provide insights into the venture's sustainability and potential for returns. 

VCs want to ensure that a startup not only has an excellent product but also a viable and sustainable business model. Metrics related to revenue, profit margins, and cost efficiency help investors gauge the potential for long-term profitability. While a high-quality product is a starting point, business metrics provide validation that there is a market demand for that product. Experts recommend including metrics like market penetration, customer acquisition, and retention rates to offer insights into the product's acceptance and potential for widespread adoption. 

As Ornament, a healthTech startup from Switzerland, faced the challenge of developing a new product for a US audience, they had to determine the market demand and optimal product enhancements for effective market penetration. With some external expertise team made necessary changes, that resulted in a product that not only met user expectations but also garnered consistent usage, leading to improved business metrics.

Another aspect is business potential and context which may be more valuable than the product. VCs seek the possibility of attaining desirable multipliers and selling their shares to another investor in later stages. Mistake: Oftentimes founders fail to address the question: ‘Why is now the right time for your business?’ ‘What has changed in the market or technology since they first considered starting their venture two years ago?’ For instance, for Kriya company it was important to showcase to investors the acquisition of initial paying customers in a new market, a proven solid business model, and market fit. Startup gathered external help to enhance its business market strategy and secured $100 million in investments, demonstrating a deep understanding of the market, effective customer acquisition, and highlighting the business potential and growth of the company.

Selling while buying

VC fund initially invests in companies, actively supporting their integration into its portfolio. The main goal is to enable exits, whether through a public stock offering or a sale to a strategic investor. In the current investment landscape, there is a trend toward nurturing the growth of companies for dividend generation or M&A, moving away from a sole focus on capital appreciation. This reflects a broader perspective among investors who value consistent income from their investments.

Against this backdrop, investors consistently weigh their profit strategy. This usually involves strategically selling acquired assets at a price higher than the initial purchase cost. This dual approach – investing for growth and considering exit strategies – highlights the balanced mindset of investors seeking both immediate and sustained returns. Experts recommend startups to proactively consider and prepare their pitch decks with an exit strategy in mind. 

After progressing through the pitch deck presentation stage, the subsequent step involves preparing a data room for the investment committee. Experts recommend including all financial documents, operational information, technology, and legal records, as well as market insights, customer and revenue data, strategic plans, and risk assessments in the data room – all essential components for investors to make informed decisions about a company's performance and potential. The absence of these critical business elements could potentially hinder the VC’s enthusiasm to progress discussions or schedule a meeting. Recognising that comprehensive expertise may not always be internal, startups can proactively engage with professionals to address any deficiencies crucial for attracting new investments and fostering business growth.