Venture Capital. Two words that simultaneously strike hope and fear deep into the core of an entrepreneur. Hope– that these mysterious groups of deep-pocketed professionals can help take your business to the next level. Fear– that you haven’t the first clue how to engage them. The good news is that seeking out and engaging a VC firm for funding doesn’t have to be daunting. It’s like any other skill, and with good guidance and a bit of practice, you will develop a comfort and proficiency in your approach. To help you embark on this journey, here are the three most important things you need to know before seeking venture capital.
1. VALUATION IS AN ART, NOT A SCIENCE The most difficult aspect of fundraising for an entrepreneur is the painful process of defining a valuation for your company. Numerous variables such as timing of the round, market size, founders’ experience and the chosen vehicle, convertible note or equity raise contribute to the valuation conversation, but addressing each variable properly is outside the scope of this article. Clear articulation of a vision, strategy and overall business plan is equally important than hard analytics. It’s about demonstrating infectious leadership to draw even smarter people into the fold of your business. Eighty percent of successful businesses end up pivoting into a completely different business than the founders’ initial business plan. This dynamism is key for the founding team to tackle the vast number of unforeseen obstacles that will definitely arise. We’ve seen plenty of robust predictive financial models fall flat when couched in a mediocre presentation of the entrepreneur’s vision and dynamism. Conversely, we’ve seen great concepts with more esoteric future cash flows succeed because the entrepreneur was 1) clear and cogent in the articulation of the vision and business strategy, 2) mature and sober enough to understand their limitations and internalize feedback, 3) magnetically attracting other talented folks into the business, and 4) well prepared, often armed with a Plan B (and sometimes C and D) business plan in case of contingencies.
2. CASH IS INDEED KING The fastest way to lose the attention of a VC is to give the impression that you don't have a realistic sense of cash flows. For investors who neither want to nor can be involved in your operations day-to-day, they have to have absolute confidence that you will not run out of money before the next funding round. An acronym the Harvard Business School professor often uses is CIMITYM: Cash Is More Important Than Your Mother. If your accounts dry up early and you haven’t hit important milestones, not only can you not make payroll but you’ve lost any negotiating position in future rounds of funding. A VC would much rather you seek out more funding up front than feel you’re bootstrapping too tightly. This is, of course, a delicate balance for the entrepreneur– the more cash raised, the more equity you relinquish.
3. NOT ALL CASH IS CREATED EQUAL… CAPABILITIES AND CONTENT MATTER When approaching a VC for funding, it’s just as important that you vet them as they vet you. You will want to have financial backers that can bring more to the table than just their cash. Look for strengths that complement yours, and strategic benefits that you can tap into to help you grow your business:
> Industry-specific capabilities and relationships Do they truly understand your product? Can they help you evolve your product or service? Can they open doors to opportunities in your industry or domain?
> Patience Do they have realistic expectations of the evolution of the business? Will they push for a liquidity event too early?
> Political capital and experience Can they step into a role as “The Fixer” if needed when you hit speed bumps? Have they gone through a number of startup cycles?
Finding a VC that is a good fit for the next phase of your company’s growth is critically important. The distillation of these few points can make navigating the VC landscape a little less onerous.
Entrepreneurs face an abundance of challenges, those in the Middle East in particular, given the developing ecosystem. With an increasing trend of talented entrepreneurs seeking funding and guidance, learning best practice processes can really draw out the distinction between a great idea and a successful business. Sell your dynamism and passion for your idea, find the right investor-partners who are just as driven to get your business off the ground as you are, and CIMITYM!