How Venture Capitalists Make Decisions?

Did you know? As per a recent study conducted by Harvard Business School, VC selects 1 out of 101 prospective start-ups.

Here are a few insights on how VC’s actually work:

Referrals play an important role when it comes to pitching your idea to an investor. More than 30% of deals come colleagues or work acquaintances, 20% of deals from referrals, and 8% from referrals by existing portfolio companies. Only 10% result from cold email pitches by company management.

For each deal a VC firm closes, the firm considers, on average, 101 opportunities of which only 1.7 move on to the negotiation of a term sheet with the start-up; and only one is actually be funded.

A typical deal takes 83 days to close, spending an average of 118 hours on due diligence during that period, making calls to an average of 10 references.

The most commonly used metrics to access deals are DCF, cash-on-cash return or, the cash returned from the investment as a multiple of the cash invested.

On average, they put 55 hours a week in on the job, spending 22 hours a week networking and sourcing deals and 18 hours working with portfolio companies. They interact substantially with 60% of their portfolio companies at least once a week and with 28% multiple times a week.

Factors that influence the decision making of the VCs are as follows:

  1. Founders (95%)
  2. Business Model (74%)
  3. Market (68%)
  4. Industry (31%)
  5. Valuation was fifth in the list

20% of all VCs and 31% of early-stage VCs do not forecast company financials when they make an investment and rest only care about absolute performance than about relative performance which sometimes leads to wrong decision by the investors and creates problems for entrepreneurs in future.

Now the question that arises is what can we do to prevent this from happening?

The answer is very simple – Valuation. Investment is most successful when it is most business like.

No matter how much you prepare for the pitch, or how much you click with the investor if the fundamentals of your business itself are not strong the investors are probably going to say no.

Valuation is important to have proper knowledge about your financials, revenues, gross margin, metrics, profitability etc. The numbers should be compelling to the investors and it should be core to your story.

Thus it is always advisable to get your business valued by a verified valuer, and do your homework before making your pitch to an investor.

To  get your company valued and know more around business valuation call +91 8820001234 or email