Five ways to ensure venture capitalists are attracted to your startup9 September 2018 Category :
Starting a business is hard. But making it a success is even harder. It requires time, effort and money—and as startups won’t see profit for several years, they sometimes seek outside investment to cover the latter.
Venture capitalists (VCs) provide capital to help fund startups, hoping to make a huge return on their investment if the business is a success. They know the risks are significant, so they only choose startups who show potential for greatness.
Want to demonstrate you’re worth taking a chance on? Here’s a simple breakdown of five tips you can put into practice immediately.
1: Show your startup’s competitive advantage
VCs want to invest in a startup that will make them money. This means they need to see the competitive advantage your startup has over others, as well as its worth in the market. You need to be able to demonstrate what it is about your product or service that makes it stand out and how it solves a particular problem for potential customers. VCs also want to see if there is money already being thrown around in this particular market. All of this information will help them gauge the ROI potential.
What you can do:
If you haven’t already, sit down and figure out your ‘unique selling proposition’ (or USP). It could be one thing (proprietary intellectual property) or it could be several (innovative sales and distribution channels, and a team with unmatched experience in the industry). Either way, make sure you are all clear on what makes you different and gives you the competitive advantage in the market. Use this to then devise a solid ‘elevator pitch’ (pitching your idea/competitive advantage as quickly and succinctly as possible) to help get this message across to VCs, even if you just meet them in passing.
It would also be good to create a pitch deck for investors – a presentation of about 20 slides looking in more detail at your idea, the market, your team, and current growth and customer base – which will help seal the deal if you’re officially asked in to pitch.
2: Demonstrate your strength of leadership and management
VCs want to know their money is going to be well managed. An investment-worthy startup ideally needs a team with experience in the industry, the market, or as a successful startup. Your choice of CEO is especially important, with some VCs admitting they invest in the CEO above all else. But make sure all members of your management team show strength in experience, ability and leadership. VCs want to see examples of your culture and philosophy in action, including how you work together, how you inspire yourselves and others, and how you overcome challenges. So be prepared to demonstrate all this, because if they don’t like what they see they won’t be afraid to make changes to protect their investment. Research even shows that 20% of startup founders end up being replaced.
What you can do:
Some VCs will be very hands on, even to the point where they come into the office to spend time with the team and gauge how you operate. Work out ahead of time the types of questions and problems you think they’ll throw at you and make sure everyone has answers or solutions prepared. You should also have a good idea about how you’ll use the VC’s investment—where you intend to spend it, such as on more advertising or on hiring new talent, and how you envisage that helping you grow. Be ready to sell this strategy with as much supporting evidence as possible.
3: Build your audience for validation and to emphasise popularity
Most startups will have a customer base that is small to non-existent. You’ll see funding as the way to change that, getting you seen and ‘on the map’. But in order to get that funding you’ll need to prove to VCs that your startup is a valid investment choice, which means demonstrating that there is a big enough audience in your market to allow you to grow and make some serious money (a small market means no opportunity to grow) and that you are capable of getting that audience’s attention. VCs will also want to see what any existing customers of yours are saying about how you’ve helped them so far.
What you can do:
It’s not that difficult to implement cost-effective content marketing and start building your audience (and customer base) from day one. All you need is:
- a website;
- the ability to create some content (blog posts, videos, infographics, etc); and
- the relevant social media accounts to share it on.
Undertaking some target customer research ahead of time will tell you which platforms you can reach them on (e.g. Twitter vs Facebook), as well as revealing what kind of information they might be looking for. This allows you to create content that resonates with them and results in plenty of shares and follows, as well as a growing audience you can show the VC. In addition, make gathering customer testimonials part and parcel of your business from the start, so that prospective VCs can hear how good you are straight from those buying the product or service.
4: Measure results and use data as proof of your business’ growing power
Being able to pitch your idea and grab a VC’s interest is one thing, but can you back it up with data? Yes, investors like being inspired. However, to really grab their attention you should show them cold, hard facts and figures that mitigate the questions of risk, prove your business’s growing power, and show the potential for huge ROI. Admittedly, most startups won’t have a lot of information to showcase in the first few months. But there are certainly ways you can pull metrics from those early days to give at least some indication that you’re a startup with potential and—we can’t stress this enough—one where the risks have been minimised. Because as Stanford University entrepreneurship lecturer, Jeff Epstein, states: “The more the entrepreneur can remove the risk, the more investors will be interested”.
What you can do:
Using a platform like Google Analytics can help you provide a simple breakdown of how your business is doing on an ongoing basis. Once the code has been implemented into your website, you can set up regular reports to show things like how many visits you’ve received and which products or services are most viewed. You can then optimise your strategy as needed and chart success stories—all of which will help showcase your management abilities (see point 2), as well as laying down those high growth potential statistics for VCs to pore over. Don’t forget to also add your social media metrics to demonstrate your audience reach. Presenting tangible figures helps to mitigate any risk associated with the unknown.
5: Research and approach venture capitalists already familiar with your industry
VCs often prefer to invest in industries with which they already have experience. That sense of familiarity helps reduce the risk when choosing a startup, because they will have more of an idea of the market and how you and your product could succeed in it. Because VCs also want to work with companies they can acquire a large percentage of (allowing them to have more control in guiding them to success), they’ll certainly be more comfortable and confident in their abilities if the startup they choose is in an industry they already know well. However, it’s a two-way street.
Working with a VC will be like working with a new partner, so you want to know they not only have the money, but the experience to help you do better than you would on your own.
You need to make sure they’re a good fit for you, if you’re seeking long-term success.
What you can do:
Do your homework on all the VCs you could possibly approach and create a list of those you think would be a good fit. Note where they’ve invested elsewhere and how well it worked for those companies. Get a feeling of how the VC works and whether they’ll work well with your team and approach. Ideally, you’ll seek introductions to them through third-parties, rather than get lost in a sea of unsolicited investment requests. However, it doesn’t hurt to cold-contact. Just make sure you mention why you think they would be a great fit, as well as pitch your idea, because they will appreciate that it’s not all about the money—you also want them for their business experience and abilities. This background research will also stand you in good stead if the investors approach you, as you’ll be able to more quickly demonstrate your awareness of their background and take your business relationship to the next level faster.
Make your startup irresistible to venture capitalists
Securing VC funding to grow your startup can be tough, which is possibly why previous research has shown only 0.05% of startups use this approach (although the average investment was the highest compared to other sources of funding). But finding the right VC who can inject enthusiasm and excitement into your business—as well as the money—can make a life-changing difference to the speed and size of your success. Following the tips above will not only improve your chances of getting on their radar but will also strongly encourage them to invest with you over your competitors.
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