When your startup is looking to raise venture capital, it’s important that you find the right partner. At last week’s Entrepreneurship 101 session, Michelle McBane, an investment director with the MaRS Investment Accelerator Fund (MaRS IAF), discussed what venture capitalists (VCs) are looking for when making an investment and why you shouldn’t necessarily jump for the first offer.

Venture capital isn’t for all startups, says Michelle, who has over 18 years of combined operational and venture capital experience. It only really works for businesses with a high potential for scale, a considerable market and a team capable of building and growing a large company.

The term sheet

A typical VC fund will meet with a thousand companies and invest in maybe 10. Of those, two may be successful, six will float and two will fail horribly. VCs will expect the winners to offset the losers to keep the fund successful, with at least a 10- to 12-times return in five to seven years.

If a VC decides to invest in you, he or she will create a term sheet, which is a non-binding document outlining the terms and conditions of the investment deal. Negotiating a term sheet is part of a VC’s due diligence—learning about you and your startup. While you may be eager to take money from anyone willing to hand it over, make sure you’re ready to do it with that particular fund.

“It’s a two-way street. We want to get to know you as founders, but you want to get to know your investors because we’re going to be together in both good and bad times,” explains Michelle.

Research the VC. CrunchBase and AngelList are good places to start. What kind of deals have they made in the past? It’s important to remember that VCs’ motivations are often driven by their fund’s model. For example, the MaRS IAF provides seed-stage investment to technology companies in Ontario. Angel investors, who invest their own money, are often driven by their personal interests.

Typical deal killers

Pulling from Mark MacLeod’s StartupCFO blog, here are a few reasons why a VC may not want to fund your business.

  • You sell services, not a product. Service businesses don’t scale quickly.
  • You are a sole founder. VCs want a strong team so that, if the founder leaves, there are people to pick up the pieces.
  • You lack VC connections or don’t know the market. Funding is a referral business.
  • You have no traction. VCs want third-party opinions about your startup.
  • You serve a niche market. It’s tougher to see how you’re going to scale.
  • You lack that “founder magic.” If you’re disorganized and move slowly, they won’t want to do business with you.

Places to connect with VCs

To hear more of what Michelle had to say, check out the video below.

Jelena Djurkic

Jelena Djurkic was the Senior Associate, Content Marketing at MaRS. Follow her on Twitter @jdjurkic. See more…