5 Points to be in place before reaching out to a venture capitalist
Fundraising is a very complex process. Getting investment from Venture Capitalists is even more so.Venture Capital (VC) is not long-term money. The short-term deal works better for venture capitalists as they go on buying a stake in an entrepreneur's idea and then nurture with investment for a short time, and then exit. Investors always want high returns and entrepreneurs or start-ups desperately seek investment at early stages to grow. Hence, ideas and strategies play a crucial role and make fundraising much easier at the early stages. It is paramount to understand check rules before approaching a VC firm.
The Investment Profile and Timing
Individual entrepreneurs or start-ups, regardless of their brilliance or charisma, are unlikely to attract VC funding if their enterprises are in low-growth market categories. And it is critical to be on time. Venture capitalists can reap exceptional rewards at low risk if they can exit the firm and industry before it reaches its peak. In a secure niche where traditional, low-cost finance is inaccessible, astute venture capitalists operate. It is advisable to approach the VC firms only when you are confident about your product innovation and timing is appropriate to reach out for funds to penetrate a big market.
Strong Leadership & Management Team
Start-ups or businesses should approach Venture Capital firms only when they have strong leadership and management team in place. VCs look for smart managers. The value of any individual to a VC is, thus, a function of numerous conditions including the right people for the right job, leadership team’s profile, the match of skill and reputation, and ability to sell oneself. For example, the majority of Canadian angel investors or VCs including Jani Ventures prefer to invest in proven, successful people and processes.
The success of Angel investors in Ontario and Toronto in Canada comes with their focus on providing capital seed to start-ups and businesses that demonstrate the strength of their people, processes, and products. A strong leadership and management team acts as a catalysing force to get the best out of these 3 Ps.
Do Not Approach If You Do Not Have a Vision
When it comes to building their core teams, smart entrepreneurs need to be very strategic, which makes it a source of value that VCs are interested in. For example, Canada based Jani Capital always prefer to look at the core values and vision of a business or startup before they invest. Not only the Ontario-based firm invests in innovations but they are also in the business of funding fast-growing companies. Aside from assessing your management team, the VC will want to learn about your company's culture and management philosophy — how your management team approaches problems and challenges. The VCs will also put a lot of value on the vision of the Founder/CEO as they prefer to invest in a Founder or CEO rather than the company.
Yet another 3 Ps (Product, Price, and Process) differentiation are the keys for getting funds for startups. As Startup investing needs due diligence from different perspectives, it is always better to have clarity on differentiations and you need to establish it thoroughly before you approach any investment companies. On the product front- have something completely different and that should be hard to replicate. Processes should be efficient. On price, you should preferably have premium pricing. If you’ve got these three differentiators, go ahead with your plan.
Market Dynamics and Referrals
The majority of investors are seeking businesses that have the potential to grow and become significant. Hence, ensuring this is critical before reaching out for investment or capital seed. Investors will want to know how big the addressable market is and how much of it you aim to take over on time. Signs of early traction or clients will be one of the most significant factors for investors. A company that has gained early momentum will have a better chance of obtaining venture capital and on better terms. Viable products, strategic partnerships, and customer testimonials are the main factors to attract VCs.
It is also important to note that VCs usually avoid direct meeting requests and wait for a warm referral. That is why obtaining a reference is so important. When one of the VC's existing portfolio CEOs knows you well and can vouch for you and your company and that is the most valuable referral you can get. Otherwise, identify someone who is familiar with both of you and can attest to your reputation in both directions.
In nutshell, having developed a strong investment proposition, selecting only those VCs who are able and likely to invest, prepared with solid materials, and introduced through a warm referral, businesses and startups are poised to succeed. Venture capital has emerged as one of the most attractive and fascinating areas of the financial world.Hence, be cautious before approaching it.
- How many investments have they made to date, and what's the average size?
- Where do they find their deals?
- Do they limit their investments by geographic location?
- How do they go about choosing investment opportunities?
- How many deals do they consider in a year?
- Take the initiative and find someone to give you a personal introduction to one of the venture capital firm's partners
- Strategically use your network and find out about the portfolio companies, and get to know the executives there
- Find out if you're a fit
- Do your research