Entrepreneurs today are on the lookout for venture capitalists that will be willing to invest in their business. Very few of them find investors that are willing to do this. In many cases, they find entrepreneurs who can’t be convinced to drop a dollar, and in the worst case, they can’t find anyone at all.
It’s not the venture capitalists’ fault, they are taking on a lot of risk by investing in startups. With established businesses, they have enough information to gauge their value. However, with startups, there isn’t enough data to go on and they can only rely on their imagination and intuition. Putting yourself in those shoes, would it be easy for you to shell out thousands and even millions of dollars? Probably not.
However, it’s not your fault either. There are many startups that investors took a chance on that are not doing as well as expected today. Oftentimes, the owners have no experience or are just plain incompetent. But that is not always the case.
Venture capitalists still put their faith, alongside millions of dollars, in the smallest businesses. What do venture capitalists see in those businesses and how can you make sure they see it in you? We’ll discuss that in the course of this article but first, let’s see what venture capital is all about.
How Does Venture Capital Work?
What exactly is venture capital? Venture capital is private equity that investors provide to early-stage startups with exceptional growth potential or small businesses that have already hit a milestone and show potential to expand further.
“Investors” in this case do not only refer to rich men with an eye for brilliant business ideas, but also to institutions like financial ones. They are known as venture capitalists or angel investors. While it could be a way to raise capital, it can also come in the form of technological expertise and other types of skills necessary for the growth of the business. In addition, it is most commonly seen at the beginning of a business, but it could come at any point.
Investors get an equity stake in the business, which means they have a say in the business decisions. They may take away the reins from you or restrain your creativity because they stand to lose a lot if your decisions don’t bring the desired results. So, if you want to retain full control over your business, this may not be the option for you. However, it is a small price to pay for the advantages of venture capital.
A major advantage is the mentoring and assistance. Most investors are well-versed in the art of business and have an eye for opportunities and talent. Under their guidance, a brilliant business idea will only keep flourishing into something bigger and better. Even better, they will connect you to other big business owners, making networking way less stressful and difficult than it would have been.
In addition, not all businesses have enough assets to take on loans or access to stock markets. This makes venture capitalists the next best option for raising capital. With them, you do not need cash flow, all you need is potential, competence, and brilliance.
Types of Venture Capital
Venture capital can be divided into three types based on the stage at which the receiving company gets the investment. They are:
- Pre-seed: Naturally, this is the earliest stage at which an investor may put money into a company. It is the stage at which the idea has taken form and is being turned into a solid business plan. At this point, the founders can seek funding.
- Seed Funding: This is after the idea has taken place and the business plan is relatively foolproof. Usually, it is when the company is ready to launch its first product. This usually requires some money so, founders may seek out investors at this stage.
- Early-stage funding: This is the stage after a company has launched its first product and needs funding for mass production and to break into the market. Naturally, they would have gotten money in the previous stage, maybe through other sources, but further investment will now be required for growth.
What Venture Capitalists Look For in Startups
Now, let’s look at it from an investor’s perspective. What would they like to see in your business? Here are some:
Have Effective Management
The first thing investors will look out for no matter whether your business is in the early stage or not is if you can handle what you claim you can. This is even more important for early-stage companies because there isn’t exactly surplus evidence to prove that you are competent at managing your business.
Effective management is the first hallmark of a successful business and it is the most important factor that venture capitalists consider. They are not looking for fresh faces with potential. Admittedly, potential is a good plus, but they need to know that you are efficient and can at least execute the business plan.
So, how do you convince them about this? The best way would be to provide them with a list of experienced people on your management team who are in charge of your early-stage company. It is easier to refine a bad idea when you have qualified people than it is to execute a brilliant idea with incompetent managers.
Present A Great Product With A Competitive Edge
What is a product without a competitive advantage? Just another fish in the sea; a product that customers can easily overlook. Now, why would any venture capitalist want to invest in a product that has no unique qualities that make it stand out to your target market?
Venture capitalists need to see that your business has a competitive edge. Is it cheaper than other products in the market? Is it more efficient or sophisticated? Even if you are just an early-stage startup, they want portfolio companies that are not like every other business out there. Your product should be able to generate sales and stand against competitors. Venture capitalists spend on such businesses.
Figure Out The Size of The Market
Let’s for a second imagine that you are an investor and you are assessing a business plan from one of the early-stage startups you are looking to invest in. You ask them about the size of their market and they start to stutter. Maybe they can get a few happy clients in the early days of the business, but they will become few and far between after that. Will you invest your money in such a business?
It’s the same way from a venture capitalist’s perspective. Do you have enough people who want what you have? You must possess sufficient industry knowledge and incorporate it well into your business plan. Your business plan should include a thorough analysis proving that people are willing to buy your products.
If you can prove to venture capitalists that your business has a large target market, it will speed up their investment decisions. Why? Because they know that it means they will be getting large returns on their invested capital. And if through marketing strategies or any other means, you increase this customer base; you put yourself in a favorable position for even further investment.
Let Your Investors Know How Much Risk Is Involved
Who wants to jump off a cliff without a parachute? No one, not even your venture capitalists, would willingly try that. So, at least let them know exactly how high that cliff is. Naturally, especially with early-stage companies, venture capitalists are already taking risks. The least you can do is let them know just how much of a risk it is.
While speaking about the company’s management, they need to know about any potential problems; legal, financial, or regulatory. Could they get in trouble with the law or any big names in the industry?
After speaking on this, you present them with ways you have come up with to mitigate risk after which they decide if they are still willing to continue or not. After all, at the end of the day, they just need to get returns on the money invested.
Conclusion
An investment from a venture capitalist is a dream come true for early start-ups. Starting your business by losing market opportunities is not a good look. This is why we have provided you with ways to get angel investors and convince them to invest in your company.
Do venture capitalists only want low-percentage equity stakes in your company? Only if they aren’t convinced. With the points above, you should be having investors knocking down your doors in no time. Employ these tactics and thank us later when your business is flourishing.