As great as your idea may be, raising funds to launch and grow your startup is one of the most difficult hurdles for a new business. Even for those with a track record of building and selling companies, it’s tough. Particularly if you’re going after top investors. Of course, it helps to put your best foot forward. But what does doing that mean, from the perspective of venture capitalists? Let’s take a look.
What a VC Wants from You
Evidence of sufficient consumer demand in your market
Big markets where people spend big bucks are attractive to VCs because, naturally, they want a return on their investment. But how big? According to Allan Wille, CEO of analytics and metrics platform Klipfolio, there’s no firm definition of a big market. But he cites $1 billion globally as a good place to start.
Wille also recommends focusing in on the particular part of that $1 billion market you plan to serve. This segment, called your “addressable market,” includes businesses that need what you sell and fit the size, profile, and geography of your target company. When talking to VCs about your addressable market, you’ll want to tell them a) how much your target businesses spend annually and b) the cumulative annual rate at which these businesses are growing. This will help you get venture capitalists to take notice.
A solid, passionate management team
As venture capitalists are well aware, dreamers grow like wildflowers. Doers are a different breed. This is why prospective VCs want to know what you (and/or your team) have done in the past to prove that you can execute on your idea. Show that when you hit the infamous “trough of sorrow,” a term Y Combinator’s Paul Graham used to describe the low point that can occur after a setback, you’ll pull through. What are your team’s strengths? What have they accomplished? To increase your chances of getting funded, think carefully about how you and your team have overcome challenges, and be prepared to talk about it.
Understanding of the VC’s area of interest
Venture capitalists specialize in different areas. Before presenting them with your business plan, executive summary, or pitch deck, know the types of businesses they back. This helps you establish rapport. Knowing your VC’s specialty also helps you avoid wasting your time on investors that aren’t a good fit for your business.
A thorough budget
VCs are understandably cautious. One way they’ll test your “fundability” is by asking how you plan to spend their money. Your answers should demonstrate your practical side. As a recent Harvard Business Review analysis reveals, VCs tend to spend less on funding “basic innovation” like R&D. Instead, their investments go towards helping with commercialization (manufacturing, marketing, and sales, for example) or improving the balance sheet (by providing working capital and fixed assets).
What a VC Doesn’t Want from You
Vague answers to hard questions
Venture capitalists are masters at ferreting out your weaknesses. Your poor growth strategy, the fact that your business hasn’t made a sale, and so on. Prepare your team for the pressure cooker of the initial meeting by critically analyzing your business to identify weaknesses and questions that could be used to exploit them.
You’ll fare better in the hot seat if you know how your product or service is different (better) than competitors, your customer acquisition costs, your company’s valuation, your definition of success, and your growth plan. Play devil’s advocate with your fellow executives until you’re sure you can remain poised when investors begin their interrogation. And remember, VCs expect you to back up your claims, so arm yourself with data.
Financial projections that make you look unrealistic/ungrounded
Your business, just like everyone else’s, will take time to scale and penetrate the market. Before predicting financial returns, be sure to factor in product costs, pricing, customer value, hiring, training, building your brand, the cost to market your new venture, and the time it takes customers to adopt your product or service.
Sure, your road to success is full of unknowns, and you may not be able to predict accurately. But venture capitalists don’t expect you to be a fortune teller. They simply want to see that you have a good business head and that your financial predictions reflect your understanding of basic business costs.
A request to sign a non-disclosure agreement
Simply put, prospective VCs aren’t going to sign an NDA. Remember, they see dozens if not hundreds of ideas that may be similar to yours, so if they sign your NDA, a misstep could expose them to a law-suit. If you’re genuinely concerned that something you share with backers could put you at risk, keep it to yourself.
Cold calls and emails
Beginning a conversation with venture capitalists is a lot easier when they hear about you from someone they know and trust. This isn’t to say that cold calls and cold emails don’t have their place in an investor outreach strategy, but you’ll be better positioned if you can find something you and your VC have in common. Try reaching out to investors who attended the same business school as you, for example, or secure an introduction through a common point of contact.
How RelSci Eases Your Startup Funding Journey
RelSci’s platform offers Investor Search, a tool customized specially for those looking to raise money. Using Investor Search, you can identify firms in your area who have invested in other firms similar to yours, giving you a targeted list of VCs whose interests align with your own. RelSci’s relationship mapping then helps you generate warm introductions to these firms by leveraging your network to connect with them. You’ll also be able to see what you have in common with VC partners, whether it’s similar philanthropic interests or the same alma mater. These details will help you make an even better first impression.
RelSci also includes deep profiles of over 7 million people and 1.5 million organizations, including almost 25,000 venture capital and private equity firms. Make sure you’re fully prepared for each VC meeting by researching the firm’s available assets, latest funds, decision-making partners, and more. RelSci’s 360° Alerts help you stay informed about the firms you’re most interested in with daily alerts on their recent investments, key executive moves, and latest news coverage.
Learn more about the powerful RelSci platform.
Your startup dreams realized
Whether you’ve been funded already, or are looking for your next round, presenting yourself in an attractive way to VCs can greatly increase your chances for success. In addition, adding RelSci to the mix can cut down on the time it takes to find and cultivate relationships with investors. To put your best foot forward, let RelSci be a trusted member of your team.