Business models that VCs love (or very likely) to invest in a Startup

If you are a startup entrepreneur who has built up a successful business and are looking to take it to the next level, one strategy could be to tap venture capital funding. This provides an inflow of money from savvy investors and can help you build up your business. Good investors also bring expert advice and helpful introductions to potential customers, rock-star teammates, and more.

From our experiences in Start-up companies, in general, there are 3 main types of business models that the VCs are more willing to invest in your company:

Recurring Revenue

Investors who love the sound of a predictably-ringing cash register pay a premium for businesses who can achieve this. The subscription revenue model used to be limited to domains such as magazines, pay TV, phone companies and fitness centers. Now the entire software industry has moved in this direction with the introduction of “Software as a Service,” or SaaS, where you pay a monthly fee and get free updates rather than buy a specific version for a set price.

The beauty of this model:  once the costs of acquiring a subscriber are established, and you've figured out how long they stay (life time value) and what the cancellation rate or “churn” will be, investors can predictably calculate how each dollar invested will increase the value of the business. Who doesn’t love predictability?

If They Come, We Will Build It

Audience growth is eye candy to venture capitalists, especially for Internet companies where dramatic audience growth has drawn breathtaking valuations even before there was a penny of revenue. The presumption is that if you have something that the masses are flocking to, ultimately you'll figure out some way to monetize it. The social trinity of Facebook, LinkedIn, and Twitter, followed by Instagram, Tumblr and Waze, have all garnered nosebleed valuations yet this way. These successes have driven valuations of the next wave--Pinterest, Snapchat and so on--right into orbit.

Freemiums

Freemium is a go-to-market approach that allows customers to try a product before buying. Customers who like buy the whole thing, or maybe some extra features (common in games such as Candy Crush). This model often goes hand-in-hand with recurring revenue, since the free version may convert into a subscription. Here VC’s will focus on conversion rates: what percentage of free users ultimately start paying.

So there you have it: three popular models VCs love. But consider this: expansion stage investors care most about the growth rate of the metrics most relevant to your business model. How fast you get profitable may be less important than you think. Dramatic growth is the real gold standard. If you can demonstrate annual--and sustainable--growth rates of 100% or more in your key metrics, you will have no shortage of investors knocking at your door with buckets of cash.

In short, nothing is free! 

VCs do not just give out money for free. When they are willing to write the big checks that can transform your business, they are also expecting a substantial return on their investment. In return, you’re agreeing to earn them a large multiple on their money, typically within 5 to 7 years.