What to Consider When You Approach Venture Capital Funding
If you’re an entrepreneur starting your own business, then you are going to need the proper funds to get your company up and running. Unless you were lucky enough to inherit a small fortune, win the lottery, or strike gold, then you probably do not possess these funds at the outset. That’s where venture capitalists come in. Venture capital funds are funds from investors who see potential in a small-to mid-sized startup. These funds are a type of equity financing that give entrepreneurial businesses the means to establish themselves and make a profit. They are considered high-risk/high-return, and the amount of risk and return involved vary based on the size of the company, its assets, and stage of product development.
Approaching anyone for money can be a stressful and intimidating experience, and this is especially true for entrepreneurs who need to convince investors that their enterprise has growth potential and is worth the risk. On the other hand, venture capitalists and other accredited investors involved in venture capital funds are taking an enormous risk in putting a significant stake in a startup business in the hopes of yielding a high return.
As an entrepreneur, before making any other considerations, you’ll first want to figure out if venture capital funding is the right kind of funding for your business. You’ll need to evaluate your business and know what venture capitalists are looking for in order to assess whether or not your interests align. Venture capitalists seek out companies that promise steady growth and a high return on investment (from 300 to 1,000 percent) within three to seven years. They also want to see that your company has a solid start, so you should already have a marketing strategy, product, and actual sales in place. If you don’t believe your company has the potential to meet those specifications, then you may want to consider other avenues of growth, such as your own funds, crowdfunding, loans from family and friends, bank credit, an angel investor or a strategic investor.
If you’re confident that your company is a fit for venture capital funding, then consider these three things before bringing your enterprise before a venture capitalist:
Find the right partner
When you have a proposition and you’re seeking feed capital to turn your ideas into reality, finding the right partner is key. This is the most important consideration there is, because this person will have a substantial share in your business and you want to make sure they are someone you can trust before handing over the reigns. Think of finding a venture capitalist to partner with as adding someone to the family; a family member understands the ins and outs of the family dynamic as well as you do, and acts in the best interest of their family.
There are several segments of venture capitalism you should consider: family ventures, fintech, and classic funds. In addition to traditional methods, family offices and fintech are two new segments of venture capital funding that are gaining a lot of traction. Wealthy families are opening up their own offices or partnering with other wealthy families to offer entrepreneurs a more centralized form of investment. In addition, fintech is taking off in the venture capital realm as well, becoming a beast of its own, due to the existence of tech funds such as Accel and Google. AngelList is a great resource for connecting with investors and you should make sure you have a profile setup before reaching out to an investor.
Get your business in order
Before approaching a venture capital party for funding, you will want to take a step back and evaluate your team to make sure you’re equipped to execute the business plan you’ll lay out for the venture capitalist. Any investor needs to be confident in your company’s ability to generate a return on their investment, so make sure everyone on your team has a full understanding of company goals and a backup plan if anything falls through.
As the founder, you should also ensure that you are bringing the right people to your team and that their skills and experience match your plan for growth. Your team members should be as passionate about your business plan as you are, and when it’s your future on the line, you can afford to be a little selective.
Have a plan
Lastly, have a concrete plan in place. According to e27.co, “Most investors (VCs and angels) won’t invest in ideas.” You should come before an investor with an actual product and progress in place (more than just an idea); they want to see that you’ve built something with measurable traction. So, to that end, get your whole team involved to fact-check the key points of your business plan, and ensure that you have a solid foundation that encapsulates its potential.