Venture capitalists look for businesses that have the potential to grow quickly to a significant size, yielding a significant return on the VC’s investment in a relatively short period of time.  VCs are not just interested in start-ups.  Your company’s current size is less important than its future aspirations and growth potential.  A target company for a VC is one that may be capable of becoming a large market leader in its industry due to some new industry opportunity and competitive advantage.  There’s no single determinant for a successful portfolio company, but a VC tends to focus on the following factors:

Commercially viable. Does the company have a product or service that can be reproduced efficiently to generate revenue?

Identifiable market. Is there a clearly defined market for the company’s product or service?  Does the company’s product or service meet an identifiable need in that industry?  Does the company have a reasonable plan to meet the identified need in an efficient, revenue-generating manner?

Strong management. Does the company’s leadership inspire confidence?  Do they have the vision, expertise, and the ability to propel a business to a significant level of growth?  Does the team consider best practices of those that have gone before them?

Sustainable competitive advantage. Has the company hit upon an idea that’s truly unique to the industry, one that has significant barriers to entry that will inhibit others from encroaching upon its market?  Has the company considered economic and technological change that may affect the business model?  Who are the company’s potential competitors, and what are those companies’ strengths and weaknesses?

Like a banker, a VC will also consider factors such as results of past operations, amount of funds needed and their intended use, future earnings projections and conditions.  But unlike a banker, a VC is a part owner rather than a creditor, so it’s looking for potential long-term capital, rather than interest income.  A common rule of thumb is that a VC looks for a return of three to five times its investment in a five- to seven-year time period.

A lot may also depend on the relationship between you and the VC.  Often, the firm will have you meet with every one of its individual partners to determine whether there’s a consensus on how the company will be co-managed.  Don’t underestimate the value of mutual respect, teamwork, and understanding.