This is a guest post by one of GetSocial’s investors, Fernando Peres Ferreira from Portugal Ventures. Fernando did a remarkable job summing up what VCs are looking for in their early/seed investment rounds. Stay tuned for excellent insights on how to position your seed-phase startup on its fundraising process.
VCs vary somewhat on how they value a seed round investment. Some consider the Team as the most important success factor, while others deem the Opportunity (Pain + Market Size) as the most influential element. Others still prize the differentiation provided by technology/solution above all else. But no matter how a VC ranks the various success factors, there are core attributes that are looked for each time a VC assesses a potential seed round investment:
A Great Team: the company is in its infancy, the market fit is still around the corner and the challenges to be faced seem almost insuperable.To have a multidisciplinary team with the right skills set is a necessary condition. Yet, Founders need also to have a drive, a commitment and a sense of urgency that will make them move mountains to accomplish their goals.
Persons a VC can work with: it may seem unfair, but a VC won’t invest in a company if there isn’t any chemistry with the Founders. The VC is going to have to work side by side with the Founders for 7 or more years. If he feels that they won’t listen to him, that their characters aren’t compatible and that it will be a constant struggle, the VC simply won’t invest.
A large enough market: the ultimate goal is to build a Billion dollar company. If the total available market for the solution is not big enough to accomplish that, the investment doesn’t make sense from a VC point of view. That, however, doesn’t mean the initial target market has to be that Big. In the beginning, focusing on a specific segment may allow the company to scale faster. Later on, additional market segments can be added so as to progressively enlarge the target market towards the total available market.
A clear and present pain that your product will solve: the new solution can be a technology marvel but if the potential customers don’t see value in it (as is the case of technologies that are still looking for a problem to solve) or if they perceive it merely as a nice to have, they most likely won’t pay for it or if it’s free they won’t use it as much as it would be needed for the project to be a success. Therefore, there must be a relevant enough need being satisfied by the new solution for the customer to use it.
Sustainable differentiation: the new solution needs to be innovative and to compare favorably with the competition, offering enough advantages to the potential customer for him to choose it over others in the market. On top of it, those advantages need to be sustainable in the foreseeable future, through Intellectual Property protection, continuous R&D effort that will keep it ahead of the competition or other mechanisms.
Promising traction metrics: Founders have to show at least a working prototype or a Minimum Viable Product of the solution being offered, as well as preliminary indicators that the market will receive well this solution.
A well structured Go-to-market plan: the management team has to show a clear path, both in terms of product development and on how the solution will be sold, to prove market fit, scalability and the business model, coupled with realistic financial projections.
The long-term plan: the seed round is just the first step of a string of financing rounds that will hopefully lead to a trade sale or IPO. First of all Founders need to show what they aim to achieve with this round of financing and when will they be able to raise a Series A round. Secondly, they have also to show how they foresee the Exit, namely who are the most likely buyers, why they would buy this company and in which time frame.