While specific requirements may vary depending on the VC firm and the type of software business, there are several universal factors that most software companies will have to demonstrate to attract early-stage funding:
- A Strong Founding Team: The team behind the company is often as important as the idea itself. Investors look for founders with a clear vision, relevant expertise, and a demonstrated ability to execute on their plan. A founding team that consists of a mix of technical expertise and GTM skills that are highly complementary are the best-case scenario. While having a solid product is essential, startups often fall flat if they are not able to rapidly market their solution and adapt to the fast-paced competitive environment. Navigating product-market fit is all about being able to pivot. Don’t expect the product you start with to be the product you’ll end up with.
- Market Opportunity: VCs want to see evidence of a sizable and growing TAM (total addressable market), as well as a clear understanding of the target audience and competitive landscape. While there is no exact threshold, 1B+ USD is a good rule of thumb for a minimum market size.
- Proof of Concept or Traction: While seed-stage companies are often in the early stages of development, having a minimum viable product (MVP) or initial customer traction significantly strengthens your position. Early signs of product-market fit—such as active users, paying customers, or partnerships—takes away risks and demonstrates your ability to deliver on your GTM plan.
- A Scalable Business Model: VCs are mostly interested in companies that have the potential for exponential growth. Such growth requires a business model that scales and can generate significant revenue. For software companies, this often means leveraging cloud-based solutions, subscription pricing models, or marketplace platforms to maximize scalability. If your MVP does not possess these characteristics (yet) it’s important to articulate your vision on how your business model will evolve and your business will scale.
When it comes to attracting early-stage funding, high-tech and low-tech software companies are evaluated differently by VCs. We’ve broken down the key differences to consider.
Low-Tech Software Businesses
For low-tech software companies, the path to securing VC funding tends to prioritize growth potential, market momentum, and scalability. These businesses are often built on more established and/or commoditized technologie. The focus here is on refining the product and proving that it can capture market share, generate recurring revenue, and expand efficiently.
- Technology Takes a Back Seat
While technology is still important, the emphasis for low-tech businesses is often not on groundbreaking innovation but rather on creating an edge by delivering a seamless user experience or solving an existing problem more efficiently. In these companies, the competitive edge may come from an innovative user experience or integrations with a large ecosystem of solutions, rather than cutting-edge technological advancements.
- Growth Potential Is Critical
VCs in the low-tech space are particularly focused on a company’s ability to grow quickly and reach economies of scale levels. Even in the early stages, sales momentum and market share are the most important indicators of future success. Early traction through direct customer acquisition or strategic partnerships, demonstrates the company’s ability to expand and capture market share.
- Path to Profitability
A key area where low-tech software businesses are evaluated differently from high-tech is the path to profitability. There are two main options: either the company can grow at a healthy pace while becoming profitable over time, or it can prioritize turning profitable quickly, even at the expense of rapid growth. With fewer early-stage investments being available and possible longer gaps between funding rounds, being able to change gears between the two options depending on the market environment is a major plus.
- Team Composition
For low-tech software businesses, VCs tend to look for strong go-to-market (GTM) teams, especially those skilled in sales, marketing, and customer support. The team’s ability to generate demand, attract customers, and maintain strong retention rates is key to the company’s success. The technical team may still play an important role, but the emphasis is more on executing a solid sales and marketing strategy rather than on technology development.
High-Tech Software Businesses
High-tech software companies, on the other hand, typically operate in emerging markets and focus on creating novel technologies with a high pace of innovation. Due to the nature of the product and its development process, high-tech companies face a different set of expectations and evaluation criteria:
- Technology is key
For high-tech businesses, the technology itself is at the core of the company’s value proposition. VCs place a strong emphasis on the technical aspects of the product, and even an innovative architecture or early-stage MVP can qualify for funding. The product’s potential for disruption and its technological feasibility are key factors in securing investment.
- Intellectual Property protection
With emerging technologies, VCs are particularly concerned about IP protection. For high-tech companies, having patents, registered IP, or proprietary technologies in place is critical and forms the basis for its valuation. This helps to defend against competitors and establish a barrier to entry. As AI and other advanced technologies make it easier to develop solutions, the importance of securing IP becomes even greater.
- Market Validation and Tech Validation
In the high-tech space, sales momentum is secondary to technical validation. While market validation is always a positive sign, what VCs are primarily looking for is proof that the technology works and can be scaled effectively. Early-stage high-tech companies are not always expected to have substantial sales traction, but having validation from (potential) key-customers that the technology works AND solves a problem massively increases your chances of raising funding.
- Team Composition
High-tech companies require a team with deep technical expertise that drives innovation. VCs typically look for founders and employees with a strong background in software engineering who have made a difference for the companies they worked for in their career. While sales and marketing are important to close the gap between technology and market demands, they typically are not the focus at the early stages and could possibly be a distraction if they come at the cost of a development slowdown.
- Capital Intensity and Time to Market
High-tech software businesses are generally much more capital-intensive, requiring larger upfront investments due to the longer development cycles and higher R&D costs. Getting a product to market in these fields can take more time and money. In contrast, low-tech companies often see quicker time-to-market, allowing them to generate revenue faster, which can help fuel growth and reduce reliance on outside funding.
Conclusion
In summary, low-tech companies tend to be evaluated on their ability to scale quickly, prove market traction, and deliver growth while focusing on operational efficiency. High-tech businesses are assessed based on their technological innovation, intellectual property protection, and the feasibility of their tech stack. Understanding these differences is crucial for tech founders who choose the VC path. However, the foundation of every software business whether low-tech or high-tech is always the team and their ability to adapt to rapidly changing market circumstances.