VC Selection Process: 5 Factors to Consider

July 18, 2022

VC Selection Process: 5 factors to consider during the competitive VC selection process to secure funds

Entrepreneurs pursuing funding understand how difficult it can be to obtain VC funding. Understanding the VC selection process is vital to securing funds. VC firms are extremely selective with who they choose to invest in because of the risky nature of startups.

1. Founding team

In our previous article, we discussed how VC’s will look at the founding team and market first. Because startups don’t have substantial cash flow to examine, firms need something else to rely on when assessing a company. A strong founding team is the start. A knowledgeable, experienced team is extremely important.

2. Promising market

Furthermore, VC’s want to see a company in a promising market. This refers to size and the stage in which the company is emerging in it. A large market equates to a large customer basis. Additionally, a company in a new market equates to less competitors and the opportunity to capitalize off of the economies of scale.

These are the factors that often serve as the determining choice but there are several other factors to keep in mind with the topic of VC selection processes. Something to remember is that all firms are different and operate their practices differently. Firms have unique processes but with the common goal of making money. As long as a firm believes that a company’s potential for profits outweighs the risk they bring, VC’s will be willing to invest.

3. Rationale

There is a certain level of rationale that the firms need to have. There is no rulebook with golden rules about investing in startups. Everything is situational. Conditions change for businesses and depending on the particular circumstances at the time being, firms’ decisions will vary even if the company doesn’t change.

A firm’s intuition is a valuable asset. At times, it is hard to provide explicit, concrete reasoning for why a decision was made but it comes down to VC’s not feeling comfortable with the situation. Since startups are significantly riskier than established businesses, it’s all the more important for VC’s to feel confident that the potential benefits outweigh the current risks.

4. Networking

Due to the sheer volume of applicants, some companies may not even be examined. While the firm may instruct founders to apply as everyone else does, reality can come in an unpleasant way. VC’s may be inclined to only look at familiar companies. Knowing someone inside the firm can help founders tremendously. It gives an edge over all other applicants who sometimes blur into one picture. Having a personal relationship with someone differentiates you from your competition and keeps your name in the mind of the investor more clearly. Generally speaking, people don’t enter entrepreneurial spaces with the right connections. Founders need to do their best to network and reach out to relevant people in the industry. It will help both immediately and in the long-run.

5. Filters

Filters help firms narrow down their application pool to a more approachable size. If they don’t select your company for funding, it could simply be due to your company not meeting certain criteria. This is why research is important. Knowing what that specific firm is looking for can prevent you from wasting time. Filters can apply to things such as development stage, geographical location, market/industry, size, being unique in particular ways, etc. If firms utilize filters, they can be found by examining the company mission statement and any other information they provide.

The VC selection process is extremely competitive so understanding these things will help give you a competitive edge. The founding team, desired market, firms’ rationale, founders’ networking, and firms’ filters all play major roles in this process. There are of course other factors that vary across firms, but these points are the main topics to consider. Regardless of whether or not you are able to secure funding right away, be patient. Finding the right founder-VC fit can take time.

That’s why with IdeasFundX, we give a big importance to the founding team background / profile and what they have achieved and why they are the best for executing the strategic plan and meeting the objectives they have defined.

As a company, are you facing difficulties in securing the second round of funding and in raising +$1M to scale up?

As an investor, are you tired of wasting time finding the right deals to invest in?

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