Investment Checklist: 6 Things VC’s Evaluate Before Funding

May 4, 2023

The early stages of a startup are always exciting, yet stressful due to their inherent riskiness. Startups need investment but getting this investment can be a nerve-wracking task. If you want to bring an investor on board, you have to convince them that they will achieve great returns by investing in your company.

Here are some questions a venture capitalist ponders over while evaluating an early-stage startup:

How strong is the management team?

Many investors may consider the team behind a startup more important than the concept or the product. The well-known VC investor Peter Thiel says, “We live and die by our founders.” The investors will try to determine whether the team has the right set of domain-relevant skills, motivation and drive, experience, and temperament to scale the business.

Involving experienced advisors can be beneficial in the early stages to help bridge an early-stage team that is still growing.

What Positive Early Traction Has the Company Achieved?

Investors want to invest in startups that are more than great ideas. They want to see momentum being built behind the product. Have you hired skilled talent? Do you have powerful customer testimonials? Have you been resourceful with the little funds that you have?

A company that is able to demonstrate early traction is more likely to secure venture financing and with better terms. Examples of early traction can include the creation of a beta or minimally viable product (MVP), paid pilots/daily average users (DAUs), transaction revenue/run rate or key strategic partnerships.

What is the market size of the opportunity?

Demonstrating that the business will target a large, addressable market opportunity is important for grabbing VC investors’ attention. For VCs, “large” typically means a market that can generate $1 billion or more in revenue.

Venture capitalists expect business plans to include a detailed market size analysis. That means providing third-party estimates found in market research reports, but also feedback from potential customers, showing their willingness to buy and pay for the business’s product. Investors will want to know the actual addressable market and what percentage of the market you plan to capture over time.

If the first product or service is small, then perhaps you need to position the company as a “platform” business allowing the creation of multiple products or apps.

Is there a competitive edge?

You have to show your investors that your product or service is a differentiator from your competition. VCs look for a solution to a real and burning problem that hasn’t been solved before by other companies in the marketplace. They want their portfolio companies to be able to generate sales and profits before competitors enter the market and reduce profitability.

Some examples of a competitive edge may include differentiated technology or intellectual property in the form of patents, trademarks, copyrights and domain names.

What are the potential risks involved?

A VC’s job is to take on risk. So, naturally, they want to know what they are getting into when they take a stake in an early stage company. They also want to understand your thought process and the mitigating precautions you are taking to reduce those risks. Startups that can show they have reduced or eliminated product, technology, sales, or market risks will have an advantage in fund-raising.

How will the capital be used?

Investors will absolutely want to know how their capital will be invested and your proposed burn rate (so that they can understand when you may need the next round of financing). It will also allow the investors to test whether your fund-raising plans are reasonable given the capital requirements you will have. It will allow the investors to see whether your estimate of costs (e.g., for hiring more talent, marketing spend, or office space) is reasonable given their experiences with other companies. Investors want to make sure at a minimum that you have the capital to meet your next milestone so you can raise more financing.

Wrapping Up

Here at GrowthPal, we connect the buy-side and sell-side, allowing your early-stage startup to raise high amounts of funding in exchange for low amounts of equity. Contact us directly at to learn about what we can do for your company.

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