Venture capitalists (VCs) play a pivotal role in the startup ecosystem, providing not just funding but also mentorship, connections, and strategic guidance. However, securing venture capital is highly competitive. In 2022 alone, VCs invested over $238 billion in startups globally, but only a small fraction of startups successfully raised funding. So, what exactly do venture capitalists look for in a startup? Based on insights from industry experts and leading resources, here are the key factors that can make or break your chances of landing VC funding—backed by facts, figures, and direct quotes.

1.  A Strong and Scalable Business Model

VCs are in the business of generating high returns on their investments. They typically look for startups that can achieve 10x returns or more. To do this, the business model must be scalable—meaning it can grow rapidly without a proportional increase in costs.

According to Preferred CFO, VCs look for businesses that can “scale quickly and efficiently, often through technology or innovative processes.” SaaS companies, for example, are a favorite among VCs because they can scale quickly with minimal incremental costs. A report by Bessemer Venture Partners highlights that the average SaaS company grows revenue at a rate of 30% year-over-year, making it an attractive investment.

2. A Large and Growing Market

VCs want to invest in startups that target large and growing markets. A big market size indicates significant revenue potential, while a growing market suggests that the startup can capture a share of an expanding pie.

As noted by Silicon Valley Bank (SVB), “Investors are looking for startups that operate in large, addressable markets with significant growth potential.” For instance, the global e-commerce market is projected to grow from $5.7 trillion in 2022 to $8.1 trillion by 2026, making it a prime target for VC investment. Similarly, the AI market is expected to reach $1.8 trillion by 2030 up from $142 billion in 2022.

Example: Uber

Before investing in Uber, investors analyzed the global transportation market and realized the ride-hailing industry could grow into a multi-billion-dollar sector. This potential helped Uber raise over $25 billion from investors like Benchmark and SoftBank.

3. A Unique Value Proposition

In a crowded marketplace, differentiation is key. VCs look for startups that offer a unique value proposition—something that sets them apart from competitors. This could be a groundbreaking technology, a novel business model, or a disruptive approach to solving a problem.

Investopedia emphasizes that VCs seek startups with “a unique product or service that solves a significant problem in a way that is difficult to replicate.” For example, Airbnb disrupted the hospitality industry by offering a unique peer-to-peer lodging model, while Tesla revolutionized the automotive industry with its focus on electric vehicles and sustainable energy.

4. A Strong and Passionate Founding Team

The founding team is often the most critical factor in a VC’s investment decision. According to a survey by First Round Capital, startups with strong founding teams are 13 times more likely to succeed than those without.

Corporate Finance Institute (CFI) notes that VCs look for founders who are “visionary, resilient, and capable of executing their ideas.” For example, Google’s founders, Larry Page and Sergey Brin, were able to secure early funding because of their deep technical expertise and clear vision for the future of search.

Example: Airbnb

When Airbnb struggled to gain traction in its early days, its founders Brian Chesky, Nathan Blecharczyk, and Joe Gebbia personally met customers, collected feedback, and even sold cereal to fund their startup. Their perseverance and adaptability convinced investors like Sequoia Capital to back them.

As Marc Andreessen, co-founder of Andreessen Horowitz, puts it: “I don’t look for companies. I look for founders.”

5. Traction and Proof of Concept

While some VCs are willing to bet on early-stage startups with little more than an idea, most prefer to see some level of traction. This could be in the form of revenue, user growth, partnerships, or product development milestones.

As highlighted by Preferred CFO, “Traction is one of the most important factors VCs consider. It demonstrates market demand and reduces perceived risk.” According to a report by CB Insights, startups that demonstrate consistent month-over-month growth are 2.5 times more likely to secure Series A funding. For example, Slack gained over 1 million daily active users within two years of launch, which helped it secure significant VC funding.

6. A Clear Exit Strategy

VCs invest with the expectation of a significant return, typically through an exit event such as an acquisition or an initial public offering (IPO). Startups that can articulate a clear exit strategy are more appealing to investors.

Investopedia explains that “VCs want to know how they will realize a return on their investment, whether through an IPO, acquisition, or other means.” In 2021, there were 1,035 VC-backed IPOs in the U.S. alone, raising a total of $700 billion in the same year.

Example: WhatsApp

WhatsApp had minimal revenue when Sequoia Capital invested $8 million in 2011. However, its massive user growth and potential for acquisition made it an attractive bet. In 2014, Facebook acquired WhatsApp for $19 billion, delivering huge returns to investors.

7. Alignment with the VC’s Expertise and Portfolio

Not all VCs are the same. Many specialize in specific industries, stages, or geographies. Startups that align with a VC’s expertise and portfolio are more likely to secure funding.

SVB points out that “investors often look for startups that fit within their existing portfolio or areas of expertise.” For example, Andreessen Horowitz is known for its investments in tech startups like Facebook and Lyft, while Sequoia Capital has backed companies like Apple and Google.

8. Realistic Valuation

Valuation is a critical factor in any investment decision. Startups that overvalue themselves risk alienating potential investors, while those that undervalue themselves may leave money on the table.

According to a study by PitchBook, the median pre-money valuation for seed-stage startups in 2022 was $12 million ,while SeriesA startups had a median valuation of $40 million. CFI emphasizes that “a realistic valuation is key to attracting VC interest, as it reflects the startup’s current stage and potential.”

Final Thoughts

Securing venture capital is a challenging but achievable goal for startups that understand what VCs are looking for. By focusing on a scalable business model, a large market, a unique value proposition, a strong team, traction, a clear exit strategy, alignment with the VC’s expertise, and a realistic valuation, startups can increase their chances of attracting investment.

Ultimately, VCs are not just investing in a business—they’re investing in a vision, a team, and the potential for extraordinary returns. Startups that can effectively communicate these elements are well-positioned to win the support of venture capitalists and take their business to the next level.

Find out more information on CB Insights , PitchBook and Bessemer Venture Partners or if you are looking for business planning consultation contact Quickers today.