How To Confidently Engage A VC With Your Startup
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By nature, entrepreneurs are very enthusiastic, optimistic, and risk-taking individuals. However, these same positive attributes can sometimes lead them blindly to failure, as many get so captivated by their business model, products, or services that they fail to see potential risks or limitations to their potential targeted market.
The key factors that lead to the collapse of knowledge-based startups include:
- Inexperience and a weak management team
- Failure to plan
- Failure to evolve
- Inability to raise funding
These factors are interlinked and operate in a manner that generates a vicious cycle, which ultimately leads to the failure of the startup. This article provides a brief description of the challenges associated with the last factor, i.e. fund raising, with an aim to inform potential entrepreneurs and raise their awareness of such challenges, and help equip them with key insight to help them plan for success.
Most venture capitalists have certain investment criteria and investment strategy that determine which companies they will include in their portfolio. These criteria may be based on the nature of industry, the company's products and services, geographic location, internal rates of return (IRR), stage of development or amount of capital required. While the average venture capital firm will see thousands of business plans per year, it will only consider a few dozen candidates and may actually close only six deals or less per year.
However, most entrepreneurs blindly target any VC firms, without any consideration to the strategic focus of such firms. This results in unproductive use of time, resources, and not to mention the anxiety and stress that comes along with the numerous rejections. Therefore, to improve your chances of funding, you must target the right investors. For, your company’s stage of development will determine the kind of venture capital investor you’ll approach, and the structure of the financing you’ll receive. Accordingly, before starting the search for capital, it’s important to:
- Identify which stage of business development and what type of financing you require.
- Take the time to research the venture-capital industry to match the characteristics of the proposed investment with the investment strategy and criteria of the VC firm.
- Be prepared before communications or interactions with any potential investors, since you will never get a second chance to make the first impression.
There are several factors that can help entrepreneurs overcome the tough challenges typically associated with launching and growing a successful business. The most important of these are also critical for continuous access to capital, particularity during the early stages of the firm when it is most vulnerable to expenses and lack of funding. For this reason, entrepreneurs must prepare a solid business case and a strong team before meeting with potential investors. Investors will use every opportunity of communication and interaction with you to evaluate you, your capabilities, and your motivation. Therefore, if you come across as unprepared or unaware of potential risks and challenges of your venture, investors will dismiss you.
Keep in mind that angel investors or venture capitalists are considering the following criteria when you are presenting your business plan to or discussing it with them:
- Management and its credibility (leadership, intellectual honesty, vision, motivation, historical success and failures, etc.)
- A validated market need
- Compelling strategy (and preferably with unfair competitive advantage), reasonable deals details (funds deployed thus far, use of funds, valuation, etc.)
The key to your success in the fundraising process will hinge on the aforementioned criteria and how confident you engage the VCs. You must balance your confidence with a healthy dose of realism so as not to appear as unaware of potential risks to your new venture. While passion and dedication will help you, overselling your idea by dismissing any challenging questions will hurt your efforts. If your VCs are interested in your business plan expect some tough questions from them. If they lose interest in you they will go easy on you, and there won’t be a second meeting.
Similarly, if you try to hide any information or downplay past business failures, your potential investors will learn about these during the due diligence phase, and they will not fund you. Past business failure is not necessarily a deal killer so long as you are able to demonstrate that you have learned from it, and you now know how to avoid such failure in the future.
Some entrepreneurs succeed in attracting the VCs to invest in their venture; however they fail to close the deal during the negotiations. Many entrepreneurs take on an adversary attitude during the negotiations, because they believe that VCs are out to take advantage of them. If you find an investor willing to invest in you, don’t waste this unique opportunity, and understand that VCs are also required to protect their interest. Find a competent attorney and try to negotiate a winning deal for both parties. If you are in the fortunate position of having more than one VC firm interested in funding you, you will probably get a better valuation than if you were to have only one investor. Use this to develop a better term sheet from both by using the BATNA (Better Alternative To a Non-negotiated Deal) framework. However, don’t overplay this to the point where both firms would walk away from you.