What Entrepreneurs Must Know to Secure VC Funding
Over my 25 years as a tax attorney and venture capital firm executive, I encountered many entrepreneurs looking to finance their dream start-up. VC firms refer to the process of soliciting an investment as the “dog-and-pony show”. This is where the entrepreneur – armed with their PowerPoint presentation and all the confidence they can muster – tries to convince well-heeled investors to exchange cash for stock in the entrepreneur’s company.
I have seen investment pitches that range from the cringe-worthy (did not invest) to my recommending writing a check on the spot (great investment).
Although each VC has a different process, it usually begins with due diligence. This is the process where the investor determines the likelihood that your business will provide the investment returns they seek. Due diligence often begins with you sending a PowerPoint presentation (10-15 slides) illustrating the Who, What, Why, Where, When, and How, about your business. The goal is to receive a term sheet from the investor. The term sheet outlines the critical financial and governing terms of the investment. This includes the company’s valuation, share price, investor rights, etc. Once you negotiate and agree to the terms in the term sheet, the investment soon follows.
To maximize the likelihood of securing VC funding there are key issues every entrepreneur should consider:
The Type of Business
Venture capitalists are usually looking to deploy millions of dollars. And they want to receive several times the return on that investment within 7 to 10 years.That means a $1 million investment returns $3 million to the investor in Year 7. If your business is in a niche market with insufficient customers, it’s unlikely an investor will risk their money on your business being acquired for millions of dollars.
Unique Value Proposition
If a similar product or service already exists in the market, it’s much more difficult to attract customers and generate revenue. Therefore, the key is demonstrating your clear value proposition, That means your business appeals to consumers, fills a market gap, and has a critical competitive advantage.
We’ve all heard stories of startup CEOs sleeping in their cars to save money, or working seven days a week for little to no salary. That level of commitment and passion is what investors like to see. Why? Because it indicates that you’re willing to do whatever it takes to succeed. Most employers want to see that commitment in key employees. And investors are essentially a prospective employer hiring you to manage their investment.
There are many people with great ideas and tons of money who do not know how to run a business. It can help if you have business school degree. But it is not required as long as you can show that you have essential business acumen. Specifically, you must speak the language of business. And demonstrate the ability to apply fundamental knowledge in areas such as finance, marketing, and management. You must show understanding of your market, your competition, and how you plan to increase your market share with the investment you’re requesting.
Sustainable Customer Pipeline
Closely tied to with business acumen is the ability to generate revenue every day and every year. For a business to be profitable long-term, it needs a sustainable customer pipeline. So, it is critically important to demonstrate that you know who your customers are, where to find them, and how to keep them. This is arguably the most important consideration. A business with a systematic, efficient way to attract and retain customers can be forgiven for deficits in other areas, such as passion or business acumen. People with more passion or better executive skills can be brought in to support you if you have sufficient revenue from customers to hire them.
Executive Team with Emotional Intelligence
Additionally, you need to show that you have good judgment and won’t let your passion place the company in unnecessary danger. Hiring a best friend who knows nothing about your business just because they are fun to be around, does not reflect good judgment. Similarly, having your social media full of pictures showing immature or irresponsible behavior also demonstrates a lack of emotional intelligence. It doesn’t matter how smart you are or how great the business idea. If the potential risk to an investment outweighs your potential to succeed, it often results in no investment.
The good news is that the investors are looking for great investments. You need to show that you are less risky and have greater profit potential than other potential investments. So, understand your business, your market, and the financial impact of business decisions. Knowing all of this will better your chances of receiving investment.