What Informs a Venture Capitalist's Quick Investment Decisions?

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    VC Realm

    What Informs a Venture Capitalist's Quick Investment Decisions?

    Venture capitalists often face high-pressure situations where swift decision-making is key, as a Managing Partner illustrates when seizing discounted valuation opportunities. Alongside expert perspectives, we've gathered additional insightful answers that highlight the critical information influencing such rapid investment choices. From the importance of team dynamics to demonstrating user growth and engagement, explore a range of scenarios and the decisive factors at play.

    • Seize Discounted Valuation Opportunities
    • Assess Team Cohesion and Experience
    • Highlight Scalable Technology Potential
    • Present Solid Market Research
    • Showcase Niche Market Leadership
    • Demonstrate User Growth and Engagement

    Seize Discounted Valuation Opportunities

    In the middle of COVID-19, at the end of 2020 on December 30th, I got a call from my partner from the Bay Area, who was describing an excellent opportunity to invest in a growing fintech platform for trading. My first question was, 'What was the multiple P/S—price to sales?' The answer was 3x. In the fintech world, during inflated, crazy valuations (10-15x or even 20x times revenue), we got an offer on the secondary market of 3 times sales? I was 99% sure that we needed to seize this opportunity. 'What is the timing for a deal?' Four weeks was the answer. So, the next month we spent on the phone with our LPs, convincing them to accept a capital call earlier and catch this deal ASAP. Finally, we made a deal in four weeks. Three reasons for that were: 1. Profitable, growing company in a hot market. 2. Discounted valuation compared to competitors. 3. Direct access to information and the seller, who had a need to sell shares quickly. Just six months after the deal, we received an offer to sell our position with a 3X ROI. That was another indicator that we had made a good decision and were moving fast to invest at a discounted valuation.

    Yury MitinManaging Partner, Red Sharks Ventures

    Assess Team Cohesion and Experience

    A venture capitalist often considers the background and the teamwork shown by a startup's founders and key players when making a decision. They look at the team's educational qualifications, professional track record, and any notable successes or failures. Moreover, they evaluate how well the members work together, their respective roles, and the overall team dynamic.

    They believe a strong, cohesive team can drive a startup towards success even through tough challenges. Assess the commitment and capabilities of your startup team before presenting to potential investors.

    Highlight Scalable Technology Potential

    Capitalizing on groundbreaking technology with the potential to grow rapidly is a key factor for venture capitalists. They analyze whether the technology is innovative, if it addresses a specific problem, and its ability to disrupt the market. Sustainable and scalable tech solutions are more likely to receive a swift positive response from investors.

    Moreover, the technology should be something that can be built upon, expanding its relevance and utility. If your startup is based on such technology, ensure you clearly outline its scalability and future potential to investors.

    Present Solid Market Research

    Venture capitalists harness thorough research and hard numbers to assess the viability of a market opportunity. They scrutinize current market trends, customer behavior, and potential market size to determine the likelihood of a startup's success. Reliable, data-driven insights into the market can make a compelling case for investment.

    They prefer investing in ventures that are backed by solid market research, showing a clear demand for the product or service. Present a well-researched market analysis to investors to attract their attention.

    Showcase Niche Market Leadership

    Startups that carve out a unique space within niche markets might catch the eye of a venture capitalist sooner. Demonstrating a strong competitive advantage, such as a proprietary technology, exclusive partnerships, or specialized knowledge that is difficult for competitors to replicate, adds value. Investors see a targeted approach within a niche as a strategic way to establish market leadership.

    If a startup clearly stands out within its market domain, it could signify lower risks and higher rewards for potential investors. Ensure your startup showcases its distinct competitive edge when seeking investment.

    Demonstrate User Growth and Engagement

    Evidence of fast user growth and engagement can significantly influence a venture capitalist's decision to invest. When a startup shows that it is not just creating buzz but also successfully attracting and retaining a growing user base, it signals market validation and potential for scale. Venture capitalists are interested in numbers that demonstrate strong momentum and customer adoption.

    Documented growth in user numbers or revenues can serve as a powerful testament to a startup's potential for success. Highlight any impressive traction your startup has gained to increase its chances of securing investment.