I often get asked about the venture financing process by entrepreneurs who are seeking venture funding for their companies. And the thing that I always emphasize is that venture financing IS NOT for everyone. Depending on the entrepreneur and the stage of the business, sources of financing can include family, friends, banks, angel investors, vendors, customers, strategic partners, venture debt and yes, venture capital. Each of these financing partners will have different motivations, risk profiles and expectations of return, and it is important to understand where you and your business fit, in that spectrum of potential financial partners as you build your business. This is critical, to avoid wasting time and making decisions that can prove to be fatal flaws for your business, as a result of unaligned interests in your stakeholders.
Different classes of investors have different perspectives, but let me share the framework that I use in my venture platform (NFQ Ventures). Note that as an early stage “micro-VC”, we have a slightly different perspective from prototypical Angels or later stage institutional venture capital funds (for more, see blog post on “Parsing the Venture landscape“).
So, what do I look for when I am considering an investment?
As a venture investor, I want to know that the founder and the business can drive a +10x return on my investment, and that NFQ can materially help to achieve a vision of global thought and market-share leadership. Because we work very closely with any founder that we back, we look for chemistry, trust, candor and an absolute commitment to winning and to having each other’s backs. Simply put, once we close the financing, we instantly convert from being investors into being business partners with our founders. Right away, that should tell you that venture financing is not for every business, and taking on venture money with a business that is ill suited for it can turn out to be a very painful affair for all involved – but that is a topic for another post :-).
Here’s a couple of things that we look for, when considering taking a position in an investee company:
- Market Definition (what problem is the technology and business trying to solve? Where is the market in the overall adoption life cycle? Is this market a “rising tide” or a saturated, competitive category?)
- Added value (can NFQ accelerate value creation through our contacts, access to talent, business infrastructure, strategic partners & next stage investors that we are able to orchestrate for the company?);
- Stage of Company (is this an idea, technology, product, solution or a business? How is the business cash flowed? Is the business pre-revenue or pre-profit? What is the past, current and projected Revenue per Employee?)
- Track record of the Founder(s) and experience of the Leadership Team;
- Evidence (customer and partner traction, endorsement rate? win ratio? repeat business ratio? growth rate?)
- Referred from a trusted source;
- Investment structure – This is our take on valuation vs. the amount of capital that is being sought. Does the post-money allocation of equity between founders and new investors remain balanced and motivating for both parties in fully diluted cap table?;
- NFQ factor (we prefer founders who have demonstrated an ability to fight through challenges and thrive during tough times);
- Growth potential (we look for investments that can generate +10x in return, given the time that we spend with our investee companies. So high growth potential is “table stakes” for our involvement);
Are we a typical venture outfit? Probably not. But I think that you might find some of these same elements in the evaluation criteria of most venture investors that you may be seeking. In most cases, they will not be as active as NFQ in your business, but that just means that they will be seeking even more evidence that the Market, Momentum and Management is on their side, before considering the investment.
Good luck with taking your businesses to the next stage, and as always … NFQ !!!