Not all startups are designed for venture capital. There are several criteria that VC’s look for when deciding whether to deploy capital or not. There is a reason for that. Some companies are just not capable of utilizing such a massive influx of cash. Startups need to have the ability to scale quickly and take over the market. These startups are also expected to pull this off within 3 to 5 years. As much as I would like to say that everybody can use this growth accelerator to achieve domination, I, unfortunately, cannot. Here are some guidelines to determine whether venture funding is right for you.
Is your startup scalable? What does this mean? It means that your company can grow without collapsing on itself. If your startup is not scalable, then perhaps you will run out of resources when demand increases. For example, take the Impossible Burger. The Impossible Burger captured a deal with Burger King, and almost McDonald’s, but they collapsed under their own success. They did not have the infrastructure in place to keep up with demand.
- Market Takeover
Can your startup take over your target market? Does it have the ability to crush the competition? Facebook is a perfect example of a startup taking over a market. Not only did they do that during their rapid growth, but they maintain this market dominance and growth by purchasing potential competitors.
Another example is Google. Google was not the first search engine to come onto the scene. Instead, they had a better search algorithm, which gave them the ability to capture the market. They did this in the face of Yahoo! and other search engines. Just like Facebook, they also continue to buy potential competitors to snuff out threats.
- Market Size
Your target market needs to be large enough. A one-billion-dollar market may seem significant, but it is not. A very rough rule of thumb is to assume that you will be able to acquire 1% of the market. If you did obtain 1% of the market, that means your company’s revenue is ten million. By using a revenue multiple of say, 3x, your startup’s valuation is now 30 million. Although good, it is not what a VC is looking for.
- Is there a need?
Your market may be enormous, and the potential upside gigantic, but is there a need? Innovation needs to be continuous within every industry. This is how society improves! Does your startup accomplish this? You may be able to find a niche market that can produce enough income to make you comfortable, but that is where it stops. Companies like this are not fit for venture funding. Why? To be blunt, it is because your startup will not disrupt the market.
It is a natural desire to want capital to scale your business to unimaginable heights. Every company has this opportunity, but each path is different. Sadly, some doors are open to one and shut to others.
Scott Hogan is an analyst at VU Venture Partners based in San Francisco, CA. He studied at the University of California, Davis, majoring in Managerial Economics. Scott previously operated a manufacturing company at the age of 20 while also working on his various startups. In his free time, you can find him playing with his two daughters, writing, or cooking a delicious meal.