Version française/French version: LINK
The profitability of venture capital investments relies on achieving significant capital gains with a limited number of major successes that offset losses incurred by a large number of investments. The investment criteria of venture capitalists are based on exceptional teams, large and growing markets, a credible business model, and tangible evidence of traction. These criteria are grouped under the « 4 M’s »: Management, Market, Business Model and Momentum. The best venture capitalists tirelessly seek to identify and fund projects with high potential, even if they remain exceptions.
E. Krieger
The investment logic of venture capitalists is very different from that of traditional financiers who try to contain risk and sources of failure. In the case of VCs, risk is part of the DNA of these bold investors who seek exceptional startups. The capital gains realized through a limited number of successful investments must exceed the inevitable capital losses of a significant portion of the investments.
It is easy to understand that if an investment fund achieves a profit equivalent to 40 times its initial investment with one of the companies in a portfolio of 20 startups, the profitability of that portfolio is assured.
The investment criteria of these modern-day gold miners are relatively simple and stem from the extremely competitive nature of the companies they fund. Creating and developing a successful startup is indeed a high-level sport where amateurism comes at a cost.
Outstanding Management Team and big Markets
« I love outstanding teams and big markets » says the founder of a European startup studio that funds tech and digital companies. This focus on teams and markets exceeding 1 billion dollars is a constant among venture capital professionals:
- These investors place great importance on the founding team of the company. They assess the ambition, experience, skills, credibility, and vision of the co-founders, as well as their ability to formulate and implement their growth strategy.
- Regarding the potential market, investors seek considerable and rapidly growing addressable markets. Therefore, they assess both the market size, actual consumer demand, competition, and differentiation opportunities for the startup.
Business Model and Momentum
These same investors also strive to understand the business model and analyze the traction that validates several key assumptions:
- The Business Model must rely on a robust value proposition: What value does the startup create for its customers and key stakeholders? What sets it apart from other market players? Investors will analyze the revenue generation model and long-term profitability prospects.
- Momentum i.e., proof of traction: Investors look for tangible evidence that validates the value proposition and interest of existing customers or users, such as audience and/or revenue growth, strategic partnerships and scalability.
« Management, Market, Model and Momentum »: The Winning Quartet
Although the screening criteria for investment proposals may vary significantly depending on the investment thesis of venture capital funds, the aforementioned evaluation criteria, especially « the team, which explains 90% of our investment success » can invariably be found.
This « 4 M » model provides a robust evaluation framework that allows the best investment funds to separate the wheat from the chaff among the thousands of investment proposals received each year. This quickly allows them to focus on the best projects, for which competition among investors is typically fierce. The best VCs constantly seek to identify and fund the « chronicle of an announced success, » even though significant successes remain exceptions that confirm the rule of this unparalleled financial sport.
…
Adapted from Krieger E. (2023), « Les 4 critères principaux que regardent les investisseurs », Maddyness, 02/08/2023 : www.maddyness.com/2023/08/02/criteres-investisseurs/ Also published on: www.ikigai-colors.com/index.php/2023/08/02/les-4-principaux-criteres-des-investisseurs-en-capital-risque/
