If you’re looking to raise capital, it’s helpful to know what venture capitalists look for in entrepreneurs. Here are the 5 qualities one of Chicago’s award winning venture capital firms looks for before they invest.
Acquisition International Magazine recently named Nin Desai the “2015 CEO Of The Year–Illinois”. While it is extremely rare for a woman to run and win this award in the venture capital and private equity area, it’s not surprising given all the other awards won in 2015 by her firm (including the Best Crowdfunded Technology Venture Capital Fund in the US). I recently spoke with Nin Desai and asked her about what she looks for in an entrepreneur before deciding to invest between $1 million and $5 million dollars in their company. Here are the 5 qualities her firm looks to validate before investing.
- Dream Big with Ideas that Scale. Its no secret that VCs are looking to drive massive revenue. In the Ad Tech sector, for example, entrepreneurs can leverage the power of today’s cloud architecture to dream up disruptive technologies that scale. The idea, however, needs to be universally applicable to all (or most) industries. The management team, likewise, must be able to innovate beyond the big idea and instead focus on the best ways to bring the idea to market. Unique revenue models such as freemiums (i.e. give your software away for free and monetize based on advertising revenue) can help ensure the big idea catches on.
- Personality Traits. How hard and long will this entrepreneur work to make this dream a reality and their business a success? (see related article, “The Cost of Being an Entrepreneur and the Key Attribute That Determines Success: Grit). “The CEO is typically the best sales person in the company,”says Ms. Desai. “With that in mind, can the CEO effectively communicate his or her ideas? Or do they lack focus? Are they easily distracted or highly disciplined? How effective you are is often driven by how focused you are and how dedicated you are to ensure your success.”
- Industry Expertise and Specific Knowledge. From growing an idea to building a large-scale sustainable business requires specific knowledge in your industry. What choices need to be made to help the company grow substantially? “The entrepreneur will be driving many of the decisions, so what are the right choices for the company?” asks Ms. Desai. “What’s their basic education? Is it related to the field that they are working in? What’s your level of industry experience? I like to see 10 or more years of experience.” Ms. Desai acknowledges that some industries don’t require as much experience, but says you should at least have a track record of innovation when you don’t have the years of experience under your belt.
- Adaptability–Circumstances change all the time. What is working today may not work tomorrow. How well can you adapt? “Start-ups change their ideas something like 5 times a year”, says Ms. Desai. “Entrepreneurs need to be ready and open to constant change. When listening to the pitch, for example, how do you respond to curve-ball questions?” VC firms want to know how well you respond to “What if” scenarios? Do you have a vision for how to respond to unique challenges in your industry? If you can’t adapt, your business will not succeed. Therefore it’s important for VC firms to clearly understand how adaptable you are.
- Choices–Life is about choice and your business is shaped by the choices you and your management team make. People are what make every business unique–even two businesses operating in the same space. In the early stages, however, it’s difficult to predict what choices an entrepreneur will make, so VC firms must evaluate the choices that have been made. “A key choice every entrepreneur makes is his or her management team,” says Ms. Desai. “Strong managers hire well to address the strategic areas of a growing company’s needs. They set aside ego and look for people who are better than them in some meaningful way. There is no such thing as a single perfect entrepreneur that can handle any given situation. However, there are strong teams that come awfully close. Also, how has the management team used their limited resources up until now? Have they burned through cash like there was no tomorrow in the hopes of finding more, or have they deliberately managed cash flow in ways that directly influenced positive growth?”
While not specifically a quality that most VC firms seek out, it helps to have a Socially Responsible Businesses. Doing well by doing good is just good business . Long-term, you need a business model that’s applicable to the industry you serve, but it helps to have a positive impact on the world. “Zynga, for example, struggled because at its core it’s about playing games,” Ms. Desai explained. “While playing games are fun, the lack of tying to do something greater than themselves caused them to struggle. Groupon is another example. Are coupons and discounts all there is? How do you build your community? How do you make things better?” Great questions. There are many examples of companies that have survived and thrived by making the world a better place. It’s nice to know that this also counts when being considered for venture funding.
