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Venture Capital For Dummies
Author:
Published:
September 10, 2013
Overview
Secure venture capital? Easy.
Getting a business up and running or pushing a brilliant product to the marketplace requires capital. For many entrepreneurs, a lack of start-up capital can be the single biggest roadblock to their dreams of success and fortune. Venture Capital For Dummies takes entrepreneurs step by step through the process of finding and securing venture capital
for their own projects.
- Find and secure venture capital for your business
- Get your business up and running
- Push a product to the marketplace
If you're an entrepreneur looking for hands-on guidance on how to secure capital for your business, the information in Venture Capital For Dummies gives you the edge you need to succeed.
Navigating the world of venture capital as you seek to raise funds for your business can be scary and confusing because of the high stakes. After you identify whether venture capital is a good choice of funding for your company, you can begin to seek out investors. When seeking venture capital, you need to know who the venture investors are and where to find them.
About The Author
Nicole Gravagna, PhD, Director of Operations, and Peter K. Adams, MBA, Executive Director for the Rockies Venture Club, connect entrepreneurs with angel investors, venture capitalists, service professionals, and other business and funding resources.
Articles From The Book
3 results
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As you prepare your company for investment, be aware that venture capitalists scrutinize all aspects of your company. You do not have to be strong in all ten aspects in order to be ready for investment, but you should strive to develop each point as your company develops. Pay particular attention to these ten areas:
People: The most important element of your company is the team.
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If you ask venture capitalists (VCs) or private equity consultants (people who help companies get ready for VCs), they’ll tell you that they see so many companies that have great opportunities but that they can’t raise a new round of funding for because of poorly structured past deals. This unfortunate situation is very common and can permanently ruin a company’s chance for VC funding.
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The most successful venture capital businesses are not just good at what they do; they are also lucky. Because you can’t do anything to improve your serendipity, you can plan your business from the beginning in ways that remove hurdles and increase the possibility of success. Follow these suggestions:
Start by thinking about the end.
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You can blow a venture company's exit in lots of ways, and it’s easy to miss some key things. Depending on how you measure success, something like 50 percent of acquisitions end up as failures. By avoiding a few mistakes, you increase the chances that your exit will be a success:
Failing to focus on what happens after the sale: It’s easy to understand why so many companies fall into this trap.
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Some companies move quickly through the process of raising capital for their business ventures, and some take a long time to close the deal. The speedy fundraisers tend to be proactive about meeting investors, and when they find the right investor, they are swift about getting them involved.
Know what you want: The most powerful thing that you can do to make your investor pitch clearer and to help your negotiations go more smoothly is to know what you and your team want for your company.
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The following outlines the most common risks that venture capitalists (VCs) look at during due diligence. The best pitch to VCs will include a presentation on the risks involved. Keep in mind, however, that thousands of other risks may be important to your business. You may have environmental risks, for example, which you would want to address.
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Venture capitalists are not out to steal your company, run your company, or otherwise ruin your life. They simply want to ensure that their investment fund makes money. Yet these rather uncomplimentary impressions persist. Here, the record is set straight.
Myth 1: A more appropriate name would be “vulture capitalists”: Venture capitalists are sometimes called vulture capitalists, a nickname that has implies that VCs are opportunistic and pick meat off the bones of sick or dying businesses.
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The funding lifecycle refers to the recurring iterations of funding that venture companies go through as they grow. Money comes from different sources at different times during the development of the company. The “normal” path for a company through the funding lifecycle is not set in stone. The path changes with trends and the economy, and is variable because of other factors like geography.
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Even the most seasoned entrepreneur will have direct experience with only a few exits of venture companies. This lack of experience can put you at a disadvantage when you are negotiating with professionals who work full time in mergers and acquisitions (M&A).
To balance the relationship, you’ll need a team of advisors to take you through the process.
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Venture capital is a unique way of getting funding for your company. Because venture investors look for companies that are growing very quickly and can make several times the initial investment for the investors, venture capital isn’t right for every company. Fortunately, growing businesses have plenty of other ways to find funding.
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If you pitch to investors and they don’t dive into your deal immediately, you have to determine why. The most common reasons for a lack of immediate due diligence are that the investor didn’t understand the company or that the investor will never be interested.
If the issue is that the investor didn’t understand the company, don’t just jump to the conclusion that the investor didn’t get it.
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Pitch decks, also called slide decks, are important tools for fundraising, when pitching your company to venture capitalists (VCs). There are a few best practices regarding pitch decks that can separate the pros from the newbies. Look like a pro by following these rules:
Make sure your slides are visible: Some pitches occur in a small office with you and the VC hunched over a computer; others may be in front of a small investment team in a conference room; still others may require giving a pitch at an investment conference in a theater designed for 600+ people.
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You can maintain a blog as a highly dynamic part of your website that might attract investor interest. A blog post is part press release, part editorial, and part entertainment. The best posts include all three elements.
Blogs can be articles, videos, photos, or any online mixed media. A blog is a way to convey how you think and what you are thinking about.
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If you do nothing else to build a public persona for attracting venture capital interest, get a webpage. Buying a web address and having a page hosted doesn’t cost very much — less than $100 per year — but be sure to avoid cheap looking templates that may do more harm than good.
For $2,000, you can have a webpage designed for you.
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A business plan is a document that describes the details of any business, and it has its place in securing capital for your business. This document includes plans for the business over the course of many years. Generally, the document can be 10 pages or 50 pages or more and includes product plans, revenue plans, income and spending pro formas, team needs over time, marketing plans, promotional plans, and strategic relationship details.
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Like the lead singer in a band, the pitch presenter sets the tone for the company. Choosing the person to present your company to investors is challenging for many companies because the person you may automatically assume should present — the founder or a key partner who’s helped the founder realize the company’s potential, for example — may not be the best choice.
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During the course of your discussions with early investors looking at your venture company, you will have to come to an agreement on some important topics, such as how much money you’ll raise right now, how much the company is worth, who’s in charge of major decision making, and who gets paid first when the company is sold.
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Your actions after you pitch to investors are almost as important as the preparation leading up to the pitch. Raising capital is very much about creating relationships with investors over a period of months. If you do a good job of staying in touch and communicating your company’s milestones, you’ll be more likely to secure your funds in the future.
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Raising venture capital money is all about relationships. You have to make genuine relationships with people in the communities where you hope to be funded. You can’t fake this. The trick is to be able to enter into a community quickly, make relationships quickly, and go back to working on your business as soon as possible.
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Convertible debt is a good way to fund a bridge in your capital fundraising. Bridge financing refers to the tactic in which a little bit of money is accepted now to help the company get to a lot of money in the future. Bridges should occur only when a very high expectation of the future inflow of cash exists.
Convertible debt ensures a company has cash on hand as it approaches a Series A round.
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A venture capital investment is a partnership between an investor and a growing company. To create a productive relationship that supports a rapidly growing company, the partnership has to be good for both the entrepreneur and the venture capitalist. To ensure that the agreement is fair and promotes the interests of both parties, pay particular attention to the term sheet and to your company's valuation.
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Pitch decks, also called slide decks, are important tools for fundraising. You need to have many investor pitch decks when you are fundraising. Short pitch decks are perfect for times when you aren’t sure you’ll be able to hold the attention of the room. Longer pitches are great when you’re presenting to investors who’ve asked for more information or are taking a second look at your deal.
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Crafting a venture compnay's exit is a lot like crafting your venture capital pitch and valuation story. You want to have as much data as you can gather and weave it together into a plausible story that leads to an inevitable conclusion for venture capitalists.
There is no better way to prepare for a big business decision than to collect and analyze data to help you understand the nuances.
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With the exit being absolutely critical to the outcome of a venture deal, it’s surprising that entrepreneurs spend so little time thinking about it. From the very beginning, a company should be designed to be attractive to potential acquirers, and that attractiveness should be part of the company’s DNA.
The following outlines some things to consider as you design your exit.
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It’s very important to figure out the type of company you’re building — a venture company or a lifestyle business — so that you can decide whether you should consider venture capital in your business growth strategies. Sometimes, determining which category you fall into is hard. Even though lifestyle businesses can make annual revenues into the millions, other things, like the type of business and/or the rate of growth, make them unsuitable for venture capital investment.
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When you are pitching your company to venture capitalists, how you dress can make or break your chances. The accepted style is different in different areas of the country — sometimes from city to city — and it may be specific to the type of company you’re representing, as well as the industry.
Boulder, Colorado, for example, has a culture built around young software start-ups.
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You can plan all your venture company’s funding rounds before you raise a single cent. Even the best-laid plans might cause you to restructure a few things as your company develops. It’s only natural.
You’ll have to restructure the office floor plan to put everyone’s desks in the office as you hire employees, and it stands to reason that you’ll have to restructure other things, too, namely the board and the capitalization table.
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It is very important to choose your lead presenter wisely, the fact of the matter is that everyone — all team members and founders — should be prepared to pitch at any time. Here are the times when you’ll be glad your whole team is ready to pitch:
Your usual presenter isn’t available. When you are invited to give a formal presentation to investors, you usually don’t have weeks to prepare.
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When you are seeking venture capital for your company, you might want to hide your risks and sweep them under the carpet, but this tack is the worst one you can take. Venture capitalists (VCs) are trained to spot risks. They’ll likely see the risks that you’ve chosen not to mention, plus a few more that you haven’t even thought of yet.
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There are a few times when your attorney more than pays for himself, and negotiating your venture capital deal is one of them. The value in having an experienced attorney goes beyond his knowing the law and includes his having enough recent experience to know what the generally expected negotiation norms are and, even better, to know how the parties have behaved in negotiations in past deals.
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To raise money, you will spend a lot of time preparing your company, explaining your deal, and making sincere friendships with investors and other people in the community. By expending this time and effort in fundraising, chances are you’ll be less frustrated by the process.
You can lose an investor in several ways: everything from simply being forgotten to sheer personal disdain between investor and founder.
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After talking with investors, four outcomes are possible: You engage in due diligence; you hear “No, thank you”; you hear nothing; or you hear “Come back after you hit certain milestones.”
Possibility 1 — You enter into due diligence with a (venture capital) VC firm
If your efforts lead to due diligence, congratulations!
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The capital in venture capital comes from wealthy individuals, pension funds, insurance companies, family offices, foundations, and other pools of cash. These entities are looking for higher returns than they can get in the stock market, but they still want to minimize risk.
To do so, they look closely at the track record of the venture capitalist in order to pick the funds that are most likely to provide a great return.
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Here, take a look at the general housekeeping terms and terms that are generally settled in early conversations with investors before the term sheet is written. (Of course, if your investor insists on a specific set of terms in one part of the term sheet, she may be more flexible about another part of the term sheet.
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“Building a better mousetrap” is a popular idiom that refers to coming up with a product that is an improvement on all other currently available technology. Many venture companies have better mousetrap products and succeed in part because of their products.
Therefore, as you position your company to attract the attention of venture capitalists, you want to highlight your product while at the same time remembering that the product cannot stand alone and support the company.
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To ensure that you’ll be well received by venture capitalists (VCs), when preparing your pitch to investors, add one more level of preparation: identifying and eradicating any bad habits or behaviors that can be distracting.
When getting to know VCs, you need to make a great first impression. Bad habits can turn investors off before they really have a chance to get to know you.
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First time entrepreneurs looking for capital are often diligent and work out a detailed plan of expenses and burn rate needed to launch their company. They then set out to raise that amount of money. This approach is flawed!
Your venture company increases in value with every milestone that you hit. If you raise 100 percent of what you need at the beginning, you’ll be lucky to end up owning 1 percent of the equity by the time your liquidity event comes along.
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Many venture capitalists (VCs) use a scorecard technique of assessing the risk of an investment, which can also be mapped to value. This table shows what this might look like. This valuation method breaks the risks into five main categories: technology, disruption, market, financial, and people. These are the biggest risk categories for a company, so this is the simplest way to assess risk.
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The exit strategy is the most important part of the job for a venture capital (VC) company. In most cases, the only way a VC makes money is when the company is sold through an initial public offering (IPO) or is acquired by another company (merger and acquisition, or M&A) or a private equity firm.
This is a key reason why, if your plan for your company is to run it for the rest of your life as a private corporation, a VC will probably not be interested.
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When a fund is closed, the venture capital (VC) company has to collect applications from companies who want to be funded. Having a constant stream of interested companies is called deal flow.
If a venture capital firm hopes to fund the best companies, it strives for good deal flow, which means that the firm sees a lot of companies every day.
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Venture capital (VC) companies add a lot more value to the companies that they invest in than just capital. They have a huge amount of experience in the industry and have their fingers on the pulse of the latest trends that impact your company. Successful VCs are also very connected to many, many people in the industry.
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In venture capital, syndication means having a number of investors get together and share in the deal rather than making the entire investment alone. Venture capital (VC) investors syndicate on a deal for three main reasons:
They don’t have enough money to fund the deal. Perhaps their limited partnership agreement limits the size of the deal that they can invest in.
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Venture capitalists often say that they “bet on the jockey and not the horse.” Translation: The management team is often more important than having a great idea, no matter how great that idea is. VCs point out that they see lots of great ideas but only a few teams that are capable of executing on those ideas.
Management teams that are attractive to VCs include people who not only have the skills to succeed in their business but are also entrepreneurs who are more interested in making money than in running a business for life.
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Venture capital funds are entities that exist to manage large amounts of money, put that money in growing companies, and then monitor the companies to protect the investment until what is hopefully a lucrative exit, when the company is at its peak value.
A VC firm is a business in itself that manages a fund which is also an entity within itself.
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When you pitch your deal to a room full of investors, you must ensure that everyone can easily hear you. For that reason, microphones are critically important in large or noisy rooms. To work well, these highly specialized pieces of equipment need to be used properly.
When pitching to investors, the handheld mike is most common, but you may come across a lavalier or a podium mike.
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It is important to connect with your potential investors when you are presenting a pitch to them. Few things are more moving than someone on stage who can connect with the audience. This is true in the theater, in dance, and also in business presentations.
There is a big difference between speaking to an audience and speaking at an audience.
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You can start making contact with a venture capital (VC) firm or investor after you and the rest of your management team have a few VC firms on your collective hit list. This process is a little like applying for a job: You can paper the world with resumes, but you’re more likely to find a perfect fit if you’re choosy.
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Searching out a venture capital (VC) investor or company is the first part. After you feel comfortable that your company is ready and your deal is mature enough for investors, you will have to actually make contact. Doing this online at AngelList or Gust is one good way to approach investors.
Aside from the broad interest and inquiries that you might get from an AngelList profile, all other contact between you and investors will have to originate with you.
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One thing to keep in mind is that venture capitalists (VCs) see deals all day long. It’s unlikely that your company’s warts are unique. They’ve seen it all. If you are brave, ask point blank what they think the weakest part of your company is. The answer may be very enlightening.
Use this information to overcome obstacles that may be slowing or undermining your ability to secure funding.
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No company is perfect. If you wait to talk to venture capitalist investors until your company is completely polished in all aspects, you could miss the optimum fundraising window. Investors want a little bit of risk still left in the company because it enables them to buy a good chunk of equity while the company is relatively cheap and can grow fast.
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When you want to attract venture capitalist attention, getting a profile set up on an investing site is a good start, but don’t just post your profile on these sites and sit back waiting for a response. Setting up a profile is just the beginning of your campaign, and you need to work to drive investors to your profile so that they can learn about your company and actively invest.
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If you get investment, the venture capitalist becomes your business partner. As with all business partners, the relationship between founder and VC is an intimate one. You must trust your VC, and she must trust you. This trust is often built during the early stages of the relationship, before the investment is closed.
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Venture capital investors are a special kind of customer. They are not buying your product. What investors are really shopping for are great investment opportunities. This distinction is lost for many entrepreneurs who fail to attract investor attention by spending their time pitching the wrong thing.
When your company has the right team, has a compelling business model, is making good progress, and has all the other characteristics that venture capitalists look for, they’ll be more likely to invest.
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Companies that benefit most from venture capital are those that have a disruptive technology or product that they aim to grow very large very quickly. Entrepreneurs who benefit most from venture capital are those who want to create a great new company and do not need to retain full control over it as it grows.
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If you plan to get noticed by venture capitalists (VCs) by simply contacting the VC, you’re missing a bunch of other important channels. Think about fundraising as a presidential campaign: You have to get the word out to as many people as possible — a feat that’s especially challenging because of laws preventing companies from advertising investment opportunities publicly in newspapers and online.
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Venture capital is great for companies that match the profile, but if your company doesn’t match, don’t worry. Lots of other opportunities are out there:
Specialized types of VC funds: Venture capital funds are allowed to make their own rules about who they fund and who they don’t fund. They also can make rules about how much they will put in each company.
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Using technology during your pitch to investors is essential, but technology can be your best friend and your worst enemy. When your audiovisual system, slideshow presentation, and physical presentation work together seamlessly, you have the appearance of confidence and mastery. When you have a glitch, your presentation turns to an uncomfortable experience at best.
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The most common way for venture-backed companies to exit is through mergers and acquisitions (M&As). Mergers and acquisitions, despite often being clumped together, are two different things:
Mergers: Typically a merger is the joining of two similarly sized companies into a new single entity. Several corporate names reflect these mergers: JPMorganChase, GlaxoSmithKline, ConocoPhillips, AOL Time Warner, and ExxonMobil, for example.
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As if LinkedIn, Twitter, Facebook, your website, and your community campaigning weren’t enough exposure to alert the community and potential investors that you’re looking to raise capital, you can post your company on online investor platforms such as Gust and AngelList.
Gust and AngelList are social media sites that allow you to share the details of your fundraising platform.
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Husband/wife, father/daughter, or other family member teams can be particularly challenging for venture capitalists. How likely is it that the best choice for a CFO (Chief Financial Officer) and CMO (Chief Marketing Officer) happened to fall in love and get married? It’s more likely that one half of the couple is a weak link.
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Talking with venture capital investors about your company is different than having a discussion with potential clients or customers. Investors want to know how you will make money for your company and subsequently for them. To impress these investors, be prepared with sophisticated materials that communicate your company, product, and plans for the future.
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Just as you would prepare your home when you put it on the real estate market, you need to get your company prepared for investors: Gathering the right advisors, making sure your records and certificates are in order, planning your future growth, and really connecting with your customer are all important points when getting ready for investment.
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Investors want to put their money in companies that will succeed. To select such companies, an investor has the difficult task of predicting which companies will flourish and which will fail. Investors like to see companies with lowered risks. A business can lower the risk to success over time by developing the business strategically and creating powerful relationships with individuals and other businesses.
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Take a look at a couple of key areas that you don’t want to forget as you develop your product and pitch your company to potential investors. Product development is the process by which your product goes from an idea to a product that customers can purchase.
Product development includes obvious aspects, such as designing, including the behind-the-scenes thought that goes into an ingenious design; testing, which also involves customer testing to make sure that the product works as expected; prototyping; manufacturing; packaging; launching the product; and the development of the sales channels that will make the product a hit.
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When growing your business, expect to raise money in stages. It’s not common to start a company and raise venture capital immediately. Instead, founders use their own money (called bootstrapping), raise money through friends and family, or take angel capital to develop a company to the point where a venture capital firm will be interested in the deal.
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Some presenters play video during their pitches to investors. If you have created a video for your product, you probably put a lot of thought and maybe money into it; as a result, you’re probably pretty proud of it. You may also feel like using a video will take some of the pressure off you in the pitch because the video gets the point across really well (you think).
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Most venture capital (VC) firms won’t even discuss signing a non-disclosure agreement early on in the conversation and companies that push this issue put themselves at a disadvantage by showing a lack of understanding of the investing environment and norms.
When you first talk with investors, determining what you should share and what you should keep secret can be hard.
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Nothing increases your attractiveness to an investor more than progress. Over time, if you can show that you are doing the things you said you would do, people will start taking you and your company more seriously. At some point, investors who were only mildly interested before will start to see you as a potential valuable asset in their portfolios.
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All successful venture-backed companies have an exit. Stock buybacks are one option for the end — the time when you no longer own your start-up anymore. Ideally, you should plan your exit well in advance.
A founder’s exit is a mixed blessing because you often walk away with a decent payout, and you are no longer responsible for your employees’ paychecks and the success of the company.
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From the moment you take on your first investor in a new venture company, you need to be very careful to account for the money that investors have given you and the company shares that they own.
The standard way to do this is with a capitalization table. This table is just a list of who owns what. In its simplest form, a capitalization table is a spreadsheet that includes the investment, shares, and percent ownership for each individual — including founders — invested in your company.
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The process of entering into a seed round with angel investors and entering into an A round with VCs is similar in some ways. Both rounds require a discussion of investment terms. Terms are just standard factors that you and the investor must consider and agree upon in the course of the investment.
They can be broken into three main categories: those that describe the amount and type of investment, those that describe the investors’ rights, and those that describe board representation, warranties, and other assorted agreements.
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Ask yourself this: If entrepreneurs and investors are like horses and wolves, which is the horse and which is the wolf? This analogy, the brainchild of Adam Rentschler, CEO and founder of Valid Evaluation, helps clarify the communication and perception challenges that exist between entrepreneurs and investors.
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A typical venture capital (VC) fund may have a 10- to 12-year lifecycle: The first 1 or 2 years are spent raising the fund, followed by 5 to 7 years of investing, followed by 3 to 5 years of harvesting. During harvesting, exit strategies are executed.
How a venture company's value increases near the end
Up to half of the ultimate value of the company is realized in the 6- to12-month period leading up to the exit.
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Venture capital funds don’t last forever. They tend to run on a predictable, ten-year cycle. To give you a better idea of your interactions with VCs, look at their activities paired with yours over the lifetime of the fund.
Investors spend the first year raising a fund from high-net-worth individuals (accredited investors), corporations, and institutional investors like pension funds.
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Your goal with your pitch deck is to tell a powerful story to your potential investors. With the company overview, you create a context for your message. After you have set the context, you can start getting into the details about your company. Put your company in a conceptual box so your audience knows very basically who you are.
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Your goal with your pitch deck is to tell a powerful story to your potential investors. Although every company’s story will be different, the key points are about money: how you make money, how much money you need, and how much money you can make in the long run with this company. The rest of the pitch is there to define and support your money story.
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When you finish giving your presentation to investors, you often have your last slide sitting on the screen behind you. Make this slide do more than just convey standard contact information. To make the best use of this screen, create a summary slide highlighting all the things that make your company exciting.
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Discussing your target market in your pitch deck lets you convey your market understanding and sophistication to your potential investors. The most important point is to show that your product is part of a large or rapidly growing market. Investors are waiting to hear a few key points when you talk about your analysis of your market:
Identify your addressable market: Investors want to know that you have identified your addressable subset of the market.
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You must ask for investment during your pitch. Doing so can feel uncomfortable the first time, but keep in mind that investors spend most of their time with people who are asking for money. It doesn’t faze them; it’s part of their jobs.
As part of the ask, you should tell investors the following information:
How much money you’re raising
How much equity you’re offering (for an equity investment)
What interest rate and discount percentage you’re offering (for convertible debt)
How much of the round has been committed
What the money you’re raising will be used to accomplish
How long the investment capital will last (your burn rate)
How much money you will need overall to get to profitability
Your ask should include an invitation for those in the audience to discuss the deal and the project further after the pitch.
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Your company has likely created a product that fulfills a need in the world. Your pitch deck needs to communicate this potential investors. Your audience needs to understand that your target problem is a big deal for a couple of reasons.
This problem may have global implications, like energy, communications, or information management, or it may address a small local need, like the need for fresh food in your neighborhood fulfilled by a grocery store.
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Your pitch deck needs to explain your business model. After your potential investors understand what your company does, the next thing they want to know is how you make money. The business model is a combination of company stage and development, product development, revenue model, and product distribution models.
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Exit strategy is a controversial topic, but you must include it in your pitch deck. Many people in the start-up world insist that you cannot build a good company if you are constantly trying to find a way out of it.
But venture capitalists (VCs) are interested in giving you their money for a short amount of time, five to seven years, and they’re obligated to return money to their limited partners in usually no more than ten years after the fund is established.
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Your pitch deck needs to explain your future milestones to your potential investors. Any milestone that is key to achieving your goals is also a risk. Any major milestone that you have completed can be considered traction or track record. Communicating these together allows investors to understand your ability to execute.
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When developing your pitch deck, explaining your marketing strategy to your potential investors is of utmost importance. You’ve no doubt heard the saying, “Create a better mousetrap, and the world will beat a path to your door.” Nothing could be further from the truth. It is much easier to make a product than to sell it.
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When developing your pitch deck, you need to describe your product so your potential investors know what you plan to sell. When describing your product, be as visually accurate as possible. Instead of listing the product as text on a slide, show a photograph of the actual product.
If your product is a component for a larger product, show how it fits into the user’s world.
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In your pitch deck, you need to sell your team to the venture capitalists (VCs). The number one cause of failure in early-stage companies is a failure to execute. Pique the VC’s interest by proving that you have an all-star team that is able to get the job done.
In other words, this topic is your chance to explain why a VC should believe that your team is able to succeed in growing your company.
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Your pitch deck needs to describe your traction to your potential investors. Traction broadly describes how far your company has come. It encompasses product development, sales, strategic partner relationships, marketing, and intellectual property. Each company measures traction differently, based on the challenges that company has faced and will face in the future.
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Valuation is a touchy subject, but it needs to be discussed as part of your pitch. You can do tons of research and analysis to determine your valuation, yet if you simply state a valuation to investors, you may come off sounding inflexible, and if the number is much higher than they expected, you can be shown the door immediately.
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As head of a venture company, you need to include risks in your communication with venture capital (VC) investors. How you go about doing that is important. First, you must understand the types of risks that investors will closely scrutinize during the due diligence process. The more you’ve thought about them, the more easily you’ll be able to respond to questions when the time comes.
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Venture capital is a very specific type of investment for a very unique type of company. Venture capital–backed companies are expected to grow extremely fast — much faster than other companies. In addition, VC-backed companies are sold after five or seven years in an acquisition or on the stock market in an initial public offering (IPO).
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When you want to raise money for your company, going online is a given. While in the past many people viewed social media sites as novelties or time-wasters, now, they are necessary for business.
Connecting with investors through LinkedIn
If your website and e-mail addresses are the most important public persona your company needs, then LinkedIn houses the most important individual persona that you need.
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Navigating the world of venture capital as you seek to raise funds for your business can be scary and confusing because of the high stakes. After you identify whether venture capital is a good choice of funding for your company, you can begin to seek out investors. When seeking venture capital, you need to know who the venture investors are and where to find them.
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Investors, venture capital or otherwise, dislike convertible debt (usually, but not always) because it offers no upside other than the interest and discount price, at least until the note converts to equity.
The investor has more risk with a convertible note and loses upside potential. The investor has more risk because the note might never convert, or many years may pass before a conversion occurs.
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When venture capital investors look at the scalability of a company, they want to see three things: that the business was designed to grow large, that the owners want the business to grow large, and that the owners have the capability to make it happen.
Scalability refers to the act of growing larger while keeping intact the ease with which business is done and the business’s profitability.
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A venture company’s success is largely hinged on an unfair advantage. A venture company needs to capture a large portion of the market that might otherwise go to competitors. To do so, it must have an advantage that competitors cannot easily copy, purchase, or develop.
Many entrepreneurs think they can rest easy in the knowledge that their product is a better solution to a market need than anything in existence.
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Company growth — regardless of the type of company — follows a predictable pattern. There will be times when your teammates have their heads down and everyone is working on developing the plan and times involving a great deal of turmoil — for bad or good.
Major changes to the business model and significant hires, for example, can be tumultuous for a small company.
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Venture capital investors want to be involved in markets that will support the kind of growth they need to be successful. In making an assessment about whether your market is big enough, VCs make a distinction between the size of the market as a whole and the size of the addressable market.
The addressable market is the part of the market that your company uniquely serves.
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Think about your venture funding strategy in terms of risk and ask your team, “What can we do to lower risk?” Some of the things you may come up with might include securing patents; filling out the team; gaining traction through technology or product development; or establishing early sales.
Setting up strategic partnerships and other relationships are another way of reducing risk by partnering with companies and organizations that can help you break through barriers by using the systems that they have already set up.
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The venture capital industry moves lots of money. The average size of a venture capital fund is around $150 million. If you think raising money for your company is hard, imagine how hard raising $150 million with no business idea at all would be! The average size of a VC investment into a company is around $8 million, but some investments are much smaller, and some are much larger.
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Venture capitalists are highly visible because they work with high-profile companies. Because of this visibility, most people know that they exist and that they help companies grow. Many people also think that the key to growing any business successfully is to involve venture capitalists.
It turns out, however, that only a small subset of all companies can benefit from using venture capital to grow.
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Mitigation strategies are the things that you can do to eliminate or reduce risk for your venture company. For every risk you list for your potential investors, you should also list your mitigation strategies.
When you’re assessing risk, the overall impact is actually a calculation of the total risk, the probability of the risk occurring, and the impact of the risk minus the effects of your mitigation strategy on the likelihood or impact.
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Risk is an inherent element in early-stage companies. The word risk itself suggests danger, possible failure, and a whole package of bad feelings. In the world of venture capital, risk means something a little bit different: risks are the milestones that your business must accomplish before your company can reach its goals.
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When venture capital firms invest, they intend to keep that company in their portfolios for four to seven years, effectively tying up their money even longer — in some cases for up to ten years. And ten years is a long time for an investor to be separated from his capital.
Think about investing in the stock market.
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In some cases of venture companies, becoming publicly owned and traded on the stock market is better for a company than undergoing a private acquisition. In these cases, the company has an initial public offering (IPO), when it sells stock publicly for the first time.
Exits are important to investors because, without an exit, they don’t make money.
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A lot of confusion exists about what constitutes an exit, also called a liquidity event. At the exit, the venture capital investors convert their investment in your company back into cash (hence the use of the word liquidity). The liquidity event can happen in a number of ways (outlined here), but the important thing for investors is that they get to put cash in the bank.
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Venture capital firms tend to specialize. They focus on a specific stage of company and one or two industries. A VC firm may focus on companies in the medical device field, for example, or maybe in clean energy.
Because VCs deal with risky investments, they have to make sure that they understand their chosen industry and technologies inside and out.
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Venture capital is a financial industry in which institutions (the venture capital firms) raise money from many sources and invest that money in high-risk companies that possess paradigm-changing ideas or technology. By its nature, venture capital is a very high-risk endeavor, and a career in venture capital is intense and often short.
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Follow the venture capital (VC) firm's rules on submitting your materials to the letter. You can follow up with a call after that is done. Then, you wait to hear their response.
Update VCs on your company’s progress
You may not hear anything after you send materials to a VC or angel investor. Months can go by without any word.
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The slides of your pitch deck are designed to support your statements, clarify your comments, and give deeper meaning to the pitch you give to venture capitalists (VCs). A well-designed pitch deck is an extremely powerful tool.
Your pitch deck is meant to support your presentation, not overshadow you. You can use images, graphs, and a few words to really add punch to your verbal presentation.
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When you create (or update) your business plan, whether for sharing with venture capitalists or for internal use, you need to plan three to five moves ahead, just as you would in a chess game. Investors want to see that you have anticipated future challenges and that you are preparing for them.
Companies that don’t think things through often run out of cash or reach insurmountable roadblocks that could have been avoided.
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Many venture capitalists (VCs) will ask you to e-mail your pitch deck to them. Other times you may mail a print version of your pitch deck to an investor. In cases such as these where you won’t be able to present the pitch deck in person, you need to include more information than you would for an in-person presentation.
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When you are raising money from venture capital (VC) investors, you have to plan your major activities three years in advance. This is important because you have to communicate your plans to investors.
Although investors are often smart people, they can’t read your mind. You have to spell out your thoughts. Looking at the big three-year plan and visualizing all the development that needs to take place over that time can be overwhelming.