Proto.in4 Article 3 : What Venture Capitalists look in You & Your Company?

Indian Stratups require funds to ramp-up their operations and venture into new areas. After acquiring few initial clients and validating revenue model, Indian entrepreneur looks for people who can invest in his/her company.
A Venture Capitalist is always seen as an entity with tons of money, who decides to invest in any company based on expected returns. Quite a few people think that for them money is the foremost thing and they don't care about anything else. The real situation is quite different and there are several other factors which help them to take final decision:-

Chemistry between Startup & VC : Any Venture Capitalist looks for right chemistry between the startup/company and their organization. They try to analyze whether the dynamics between their company and founders is good, average or bad. Most of the times VC decide not to put money in companies with great idea but bad dynamics. They spend enough time with founders to understand their viewpoint and attitude. They want the business to grow and hence don't like founders who want to hold the top position forever. Venture Capitalists typically like people who think of growing the company leaving aside their personal benefits only. The flexibility and agility of founding team to sustain in competitive environment is thoroughly tested by any Venture Capitalist before making any investments.

Business Term-Sheet : Venture Capitalist put money in companies keeping in mind an investment horizon of 3-5 years. The terms and conditions of any engagement is captured in a term-sheet which includes items like Price/Valuation, Type of Security, Liquidation Preference, Liquidation Preference, Dividend, Conversion Rights, Voting Rights, Registration Rights, Board of Directors etc. Negotiating the terms of the agreement is part of establishing a close working relationship with venture capitalist. Most of items of term-sheet are non-negotiable, but there are smart ways to negotiate the right deal. Venture capitalists have a lot of leverage negotiating terms that help them increase ROI simply because they have a firm grasp of the market. Things like liquidity preference (how much money they get out before the founders in a sale), veto rights and other preferred stock privileges can affect the long term economics of a deal substantially.Entrepreneurs generally rely on their attorney and contacts to help them understand the current trends in terms.

Due-Diligence : Venture capitalists do background research to get information about the founders and company. They don't take all your statements on face value. Similarly, the startup should also carry-out due diligence about the venture capitalist. They should see their investment portfolio and talk to few companies to get first hand information. They can also gather information related to experience, term-sheet etc. from different sources. The idea here is go get into a relationship which is mutually compatible and may not see mid-way jitters. After both parties have done due diligence the marriage happens.

VC is not Money-Machine : VC should not be seen as a person who is just throwing away his money to you. He brings a lot of expertise and contacts to help you grow. But at the same time he shouldn't be seen as a person who can solve all of your problems. He will always lend you supporting hand, while you need to be on the fore-front of business. VC is not interested in getting into each and every affair, but to give some strategic inputs and directions at appropriate time.

A VC should be seen as a partner who wants mutually beneficial relationship while giving you enough freedom and liberty.