What makes a startup VC backable?
Here's what VCs are looking for in technology startups they invest in. Hint: VC backable startups aren't always successful, and successful startups aren't always VC backable
Hello Hello 👋🏾
You’ve probably heard the term “vc backable” somewhere before. This term is often to used to express the types of startups VCs will invest in.
The truth is, not all startups should be fundraising from VCs. VCs is short for “Venture Capitalists”. These are professional investors who invest in startups and expect a financial return that allows them give their investors back their money plus some.
They are always looking for businesses that can return extremely large financial outcomes. 100x minimum for average early stage investors. To VCs, “good return” isn’t good enough, it is either “great” or nothing.
Here are a few markers VCs look for in startups before they can consider them for investment.
Photo by Bill Jelen on Unsplash
💡 Remember: Just because as a startup you don’t fit this mould, does not mean your startup isn’t good enough.
Keep building what people want and need. A Scalable Business Model
VCs are looking for something that grows fast. For a company to grow fast, it needs to be scalable. That means, it should be able to acquire and serve customers very quickly and relatively easily even as it grows.
This is why VCs love technology companies so much. With technology - you can grow to serving millions of customers without having to hire millions of employees. This is why sometimes, VCs stay away from hardware products, or consulting type businesses.
In their minds because you can’t grow this volume to hundreds of thousands, maybe even millions of users, it isn’t scalable.
If it isn’t scalable, it probably won’t grow quickly enough.
If it doesn’t grow quickly, it is unlikely to give significant returns.
Remember 100x?
A Large Financial Outcome
This is an illustrative expectation of an early stage VC.
I invest $100k in a startup at $1m post-money valuation
In 5 years i want them to grow to $100m annual revenues
At a 10x multiple on revenues they could be valued as a unicorn 🦄
Even with an 80% dilution, that’s a 100x on the initial investment of $1m
On one startup, the VC makes $100m in returns for investing $100k
💡 A unicorn is a privately held business valued at $1bn+If as a founder, you build a business that gets acquired in 5 years for $20m and you own say 50% of the business at exit. That’s a $10m payout to you. That’s incredible.
To VCs this is a failure ❌
This is important to know, so you do not use VC funding as a measure of business success. VCs are gunning for outliers.
A Startup Can Grow At Rocket Speed
It is one thing to have a scalable business model, and another thing entirely to grow at the pace required to hit the expected growth and financial outcomes VCs expect.
As a founder exploring VC funding, this can be a lot of pressure.
Be sure you are ready and capable to both create, and handle it.
Not all industries, or solutions can give this speed of growth.
Not all founders can handle it.
VCs are looking for markets that can house this speed, and founders who can ride a rocket ship
Think of a literal rocket ship 🚀
Figuratively speaking that’s how fast the VC model needs you to go. Rocket ship crashes are often fatal.
An Exit Opportunity
It’s all paper gains till VCs can get their money out and as they go in, they try to figure out if they can get their money out.
Exits happen many different ways for VCs, either via an acquisition, a follow on funding round where they sell their stake to new investors at a higher price than they bought shares, and an IPO (initial public offering)
So, if you’re a founder not looking for an exit for your investors, or want to exit too soon. VC funding might not be for you.
The VC model has revolutionised how startups are built, and has birthed innovations that have changed how we experience the world.
It’s amazing honestly. But its not for everyone.
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Maria