Tips for raising venture capital for your startup
Venture capital is often a crucial aspect for a startup to turn from a snotty-nosed new kid on the block to a major international player. It’s by no means the only way to raise funds but the prestige, experience, and contacts that VC-backing brings can be a big competitive advantage for a growing business.
Nevertheless, dealing with VCs can be tricky. While you might feel as though your startup is unique and worth every penny of investment, you won’t be a VC firm’s top priority; your value to them may not be as great as their value to you. With 60% of businesses failing in the first 3 years, your startup is a risk that they need to weigh up. So, you need to be able to convince a VC that they should get on board at the same sort of level that you value your company.
When seeking backing, you should ask yourself if the equity and loss of control that can come with investment are worth the injection of capital and expertise.
GET IN THERE EARLY
The best time to first make contact with a VC is relatively early on, to whet their appetite as quickly as possible. If they aren’t keen on pursuing a relationship at that point, at least you don’t lose anything. The next time you cross paths, it is likely that you will have improved upon your humble beginnings and be able to show the ways you have grown to be an attractive business in a short space of time. One VC investor describes this process as perfect for demonstrating ‘momentum’ and your ability to develop quickly and efficiently beyond the initial phase. It is also a great case for building a long-term relationship with a VC, rather than seeing your pitch as a one-off.
KNOW WHAT YOU WANT
Taking the plunge and looking to secure VC funds can be the thing that takes your business to the next level, so in order to avoid some common mistakes that will result in no investment, let’s look at how to go about identifying, wooing, and closing a VC round.
Firstly, make sure you know what kind of investment you are looking to secure. There are three types of venture capital: early-stage financing, expansion financing, and acquisition or buyout financing.
Early-stage is further split into seed financing, startup financing, and first-stage financing depending on how far into the process you are. Usually, early-stage financing is used to develop a product or service and invest in marketing. Expansion financing is also split into three sub-categories: second-stage financing, bridge financing, and third-stage financing.
Companies asking for expansion financing are most likely planning to use it to build on existing products or services and increase production and/or marketing.
Acquisition or buyout financing
This is used to assist companies with acquiring parts of the business or another company.
Once you have decided which type of financing you want, you will then want to have a look at your methods of approaching venture capitalists. Cold calling won’t work, neither will a stakeout at the HQ hoping to pounce as someone leaves for a lunch break. The best thing you can hope for is an introduction through somebody that a VC trusts. This will involve some serious networking and charm. This trusted individual could be someone they have previously invested in, an angel investor, or simply someone in the industry that they know and value the opinion of. The stakes are high when investing in a startup, so having them lowered (even incrementally) by getting vouched for by a close connection can be incredibly valuable.
KNOW YOUR PITCH THROUGH AND THROUGH
Next, work out your pitch. A great pitch largely relies on an ironclad business plan. Your business plan needs to be as detailed as possible and you should know it inside and out. The VC backer is going to quiz you on it, so you don’t want to be caught out without an answer. Figure out everything from your burn rate to your break-even point. Make it as complex as it needs to be, but don’t make it confusing. This means sticking to your strongest points and keeping it factual – don’t try and put up any smoke or mirrors because a VC will see straight through it. Forbes has a great guide to help you create the perfect VC pitch.
THINK OF YOUR GROWTH
Ultimately, the number one thing that a VC will care about is the return on their investment. You might have a great idea, but ask yourself – is it scalable? How quickly can you grow and how much money will it take to get there? Hopefully, you will have done your research into your target market and will have an idea of whether it is big enough to provide ample opportunity for fast growth. And if you are sure the market is there, you need to be prepared to convince VC backers that you know what you are talking about, or, ideally, that no one knows what they are talking about more than you do.
GIVE A REALISTIC VALUATION
When it comes to the point of your pre-money valuation, be sensible about it. Your valuation has a huge impact on a VC firm's decision because it determines the return they will be getting for their investment. Obviously, it might not mean a lot in terms of how much your company is worth at the moment, but it will be an indicator to investors of the speed of your all-important growth rate. Be prepared to justify your valuation and negotiate with VCs.
Have confidence and stay driven. VCs won’t invest in something that they don’t think will succeed. So in order for them to believe in it, you need to appear passionate. The best idea in the world still wouldn’t succeed without the motivation and drive that pushes the person or people behind it. People buy into people. Show the venture capitalists that you know you can make your company brilliant and you’re halfway there.
BrighterBox works with some of the best startups in London. We connect great companies with bright graduates and we'd love to hear from you.
*Editor's note: This blog was originally published in 2016 and has since been updated.