It doesn’t have to be hard to get funding from a venture capitalist. With small business financing, it’s about knowing your options and how to qualify. The same goes for venture capital. It’s about knowing what type of startup company a venture capitalist wants to invest in. Your startup company has to qualify for venture capital. It starts with your startup company management team. According to the report How Do Venture Capitalists Make Decisions?, venture capitalists attribute the likelihood of a successful investment to the company management team. A competent company management team is more important to them than the company product, service or technology for sell. That’s only the beginning. What else do you need know? Keeping reading. I’ll educate you on what venture capitalists do and how they identify a potentially successful investment. By the end of this blog, you’ll know if a venture capitalist will invest in your startup company or send you packing.
What is a Venture Capitalist?
That question may seem “elementary”. Yet many aspiring entrepreneurs don’t know the answer. Simply put, venture capital is private equity. Private equity is business funding invested in private companies, in return for a percentage of ownership. Investors with a high net-worth invest in privately owned companies that they expect to yield a high return in a short amount of time. There are also “institutions” of investors that partner up to form a venture capital firm (VC firm). These investors pool their money together to create a venture capital fund (VC fund). The money in the venture capital fund is for investing high growth startups. Just like the startup company you plan on launching.
A venture capitalist shouldn’t be mistaken for an angel investor. Most venture capitalists pool their money together in a venture capital fund to invest. Furthermore, they prefer to invest large amounts in privately owned companies. An angel investor is usually an individual (or small group of investors) that invest smaller amounts of money into startups. That’s the biggest difference between the two— how much they invest. Angel investors are the people you go to when you need less than $2 million for a startup company. That amount of money is too small for a venture capitalist. Just ask the founders of Google. They received their first $100,000 investment in Google from an angel investor. A Stanford professor by the name of David Cheriton. If a venture capital investor is what you seek, you better need more than $2 million and own a startup company worth the investment. Will a Venture Capitalist Invest in My Startup Company?
Last year one of my business associates partnered with a venture capitalist firm to launch their business incubator in our area. I remember him promoting the business incubator on Facebook. He received a lot of interest from aspiring entrepreneurs. None of them offered the type of investment opportunity the venture capitalist firm was looking for. The problem was that most of them had Main Street business ideas. They wanted to open up daycares and grocery stores. While there’s nothing wrong with these types of businesses, a VC firm will not see them as an investment opportunity (in most cases). Businesses like daycares are microenterprises. Microenterprises are small, local businesses that usually have no more than 5 employees. If your business falls into the category of a microenterprise (or Main Street business), a venture capital investment is not right for you. Examples of Main Street businesses include local retail stores, bars, clubs, lounges, and mom and pop shops.
What Type of Startup Company Do Venture Capitalists Prefer?
A venture firm invests in innovative, low to high risk businesses that also come with high rewards. These are the “Wall Street” businesses of the world. (Wall Street is the opposite of Main Street). A venture firm is seeking high returns in the shortest amount of time. The types of businesses a venture capitalist firm can get high returns from include companies like Amazon, Apple, Facebook, Microsoft, and Google, etc. All these companies have something in common. Their company founder came up with a good idea but didn’t have the money to fund it. That’s what a venture capital investor does— funds a good idea. Another thing these companies have in common is they are in the “tech sector.” They also all went public at some point. But having a good idea and being in the tech sector isn’t enough (unless you’re dealing with a Silicon Valley venture capitalist). A Silicon Valley venture capitalist likely prefers to invest in tech businesses.
How Do Venture Capitalists Select the Businesses They Invest In?
The reality is that venture capitalists select the businesses they want to invest by focusing on other factors besides “industry”. The report, How Do Venture Capitalists Make Decisions?, was completed using a survey of 900 VC firms in the venture capital industry. Based on the data obtained from the survey, venture capitalists focus on the following factors when selecting a business to invest in— (ranked in order importance):
As you can seem from the list above, “industry” ranks fifth in regards to importance. This is true for early stage financing. For later stage financing, “company valuation or financial projections” ranks third. What does this mean? It means that if your startup is an early-stage company, you need an experienced management team, exceptional business model and great product to be considered for early stage financing. There also has to be a market for your product. If these are not intact, it’s time to go back to the drawing board.
How to Get Venture Capital Funding: What Venture Capitalists Want to See
That’s a start for how to get venture capital funding. The work is just beginning. Securing a venture capitalist isn’t automatic because you have all the requirements. It’s a tough process that many entrepreneurs fail to master. Venture capitalists take risks on businesses who bring more than innovative ideas. They want calculated risk takers with a solid foundation. They also want to work with businesses who will make them large profits.
What you see on Shark Tank isn’t too far fetched. It gives you an idea of how to get venture capital funding and the pitching procedures. The process of convincing venture capitalists is rigorous. In your short time pitching, they comb through intricate details of your business. They want to know how successful you’ve been without them. Their investment goal isn’t to rescue you. It’s to take you to the next level and make everyone money. Keeping that in mind, you could stand to improve your written plans and leadership team.
What a Strong Management Team Looks Like to a Venture Capitalist
As you’ve already learned, the most important detail for venture capitalists is your management team. Choose each member while keeping the end goals in mind. Make sure the individuals are able to work well together and help reach those goals. Venture capitalists look for certain qualities in management teams they consider working with.
Leadership skills
There’s a difference between being a manager and being a leader. Leaders take initiative. They see opportunities for solutions where others only see problems. They don’t mind getting in the trenches and putting boots on the ground. Solid leaders are humble and able to work well with the team. At the same time they’re confident in their capabilities. Venture capitalists prefer to work with relationship oriented leaders.
Communication
This skill is at the core of every successful relationship. Business is no exception. The better the communication, the more likely it is for the business to excel. Members of your management team should communicate differences in a healthy way. Entrepreneurs need to visit every angle of a proposal before it leaves the board room. When communication is strong, everyone can respectfully voice their opinion without feeling intimidated.
Passion
When learning how to get venture capital funding, you’ll find passion is a must. The energy passion brings is not one of those things you can develop or even pretend. Venture capital investors will know the difference. When you’re passionate about your team and business, it shows through engagement. Develop a management team who believes in what your company is doing. They need to want success just as much as you do.
Resilience
Change is a guaranteed part of business. There will be successful and unsuccessful stages. The stability of your leadership team depends on their abilities to adjust. When a project doesn’t turn out as expected, will they be able to bounce back? When the market demand changes, your management team needs to react with fresh ideas. Venture capitalists are attracted to flexible management teams.
Unity
Like communication, unity demonstrates that company is on a clear path. It’s not enough to show individual strength. Everyone needs to be on one accord. The qualities each person has should merge together to represent a strong team. The growth and development of the business depends on it. Your VC investment depends on it too.
Talent
Venture capitalists look for teams who have used their talent to expand ideas. When selecting your management team, think about what each person brings to the table. Are they people you view as highly as yourself? Go beyond educational background and work experience. Look for qualities of an entrepreneur in each member of your management team.
Perfecting Your Venture Capitalist Pitch
Another thing you must know about how to get venture capital funding is the importance of a strong pitch. It’s your few minutes to get face-to-face with investors and wow them. It’s not nearly as important as a sound management team. It could still be a deal breaker if all else about your business is attractive to a VC. This is your time to show off your talent, teamwork, passion. When putting together your pitch, keep a few things in mind.
Be honest
Never make up answers to questions you don’t know. You’ll earn more respect by communicating that you’ll get the information back to them as soon as possible. Don’t exaggerate or try to do what you think the venture capital investor want. Being authentic will help you get with the right VC who will help you reach your goals.
Tell your story
Most business ideas have an interesting story behind them. Venture capitalists want to hear it. They want to know your reason and what keeps you invested when it gets tough. If you’re a team, it would be great to share how the partnership came about. Don’t be boring or ramble, but make it compelling. If starting and growing your company is about more than money, you should be able to do this with ease.
Share your strengths and weaknesses
You’ve learned about the ways venture capitalists can help outside of money. That’s why it’s important to talk about your opportunities for growth. Discuss what your company has accomplished so far. After that, share the areas that need work. That gives the VC an idea of what they’ll be walking into as a partner. It also helps them decide if they have the skills you need to strengthen those weaknesses.
Know your financials
At this point, you should have a well crafted business plan. Most of the numbers you need will come from the homework you’ve already done. Be specific and use your milestones to discuss specific financials. Know how much revenue you’ve earned, your profit margin, what you need, and how you plan to use it. When a venture capital investor asks financial questions, your answers should be automatic.
Share your vision
You should already be familiar with your objectives for the next five years. Communicate those during your pitch. Prospective VCs want to know that you have long term growth goals. Also share what you’re expecting from a venture capitalist relationship beyond investments. This is important for having the right skill set to help execute your vision.
There’s a slim chance a VC investment is your golden ticket to entrepreneurial success. If you want to give it a shot, do so with careful planning. Learn everything you can about how to get venture capital funding. Build the right team and have a solid strategy to generate revenue. Put your proposal in front of venture capitalists in your market.
How to Approach a Venture Capitalist
Venture capitalists are usually introduced to businesses in need of funding through a network. A venture capital database like VCPro is a network that can help you connect with venture capitalists that may invest in your early-stage company. There are over 5,000 investors listed in this venture capital database.
Before you begin seeking a venture capital investment, you should prepare. Preparation includes developing your business plan, marketing plan, financial projections and a pitch deck. You should also practice your 60 second pitch. Venture capitalists may first ask you to do a pitch. In this case, your 60 second pitch and pitch deck will come in handy. If they like your pitch, they may ask to see a full business plan. If you have all these things ready and you meet the selection criteria I outlined in the earlier part of this blog, you may be ready to approach a venture capitalist for funding.
What Can a Venture Capitalist Help Me With Besides Funding?
According to the report How Do Venture Capitalists Make Decisions?, venture capitalists help the companies they fund in different ways. Based on the data obtained from the 900 VC firms that were surveyed, here’s what they help with the most—
–Post-investment Strategic Guidance
–Connecting Investors
–Connecting Customers
–Operational Guidance
–Hiring Board Members
–Hiring Employees
Venture capitalists don’t just invest in businesses, they build them. The services they provide to businesses are what make them successful. When working with venture capitalists, you can expect receive more than funding. You’ll have a venture partner as well. You (and your team) won’t be in business alone. Venture capitalists want the biggest return on their investment in the shortest time possible, so they help your business where needed.
Sources:
Harvard Business Review: How Venture Capital Works
Forbes: Professor Billionaire: The Stanford Academic Who Wrote Google Its First Check
SSRN eLibrary – How Do Venture Capitalists Make Decisions?
