Investment Deals Are at Historic Levels. Want to Be Part of It? Be Ready to Answer These 4 Questions.
4 things to ask yourself before you make your pitch.
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It's no secret that venture capital deals are headed for record-breaking numbers. If funding continues to trend as it did in the first quarter of 2021, experts predict the number of total VC funding rounds could hit 16,000 by year's end. Together, those rounds would end up flooding about $280 billion into the global marketplace. And almost a half-million startups hit the ground in January alone, per the Financial Times, creating a running start to what looks like a runaway VC year.
But with competition comes increased scrutiny from VCs. They're still risk-averse and looking for partners who can deliver. If you're seeking investment and partnership, you have to be ready to impress -- or risk losing out on the potential to dip into a phenomenal outpouring of cash.
Related: Would Your Business Benefit From Venture Capital?
If you want to be a good partner for a future investor, you must earn their trust and confidence before you earn their capital and support. The way to do that is through a strong business model and thorough preparedness at each step as you build your relationship. That means you need to self-reflect and do your research. And remember: If you can't articulate your success to date as well as how you'll parlay their contribution into returns, you won't get far.
Below are four questions to ask yourself before you talk to any investor. As someone who's been on both sides of the VC table, these are the topics I've seen come up the most:
1. Do I know who my customer is?
VCs want to hear that you have a keen understanding of who your customers are and that you're not attempting to boil the ocean. Especially in the early stages of growth, it's better to focus on a specific vertical rather than trying to be everything to everyone. Being focused will help you build a solid foundation on which you can validate your business case. VCs understand this and will appreciate focused ideas.
Take the first iteration of my company, for example. It began as a focused, narrow solution for community banks. However, as our capabilities grew over time, our team was able to expand to adjacent verticals across the financial services spectrum with larger, and more complex, use cases. Starting with a concentration allowed us to saturate a single vertical and fine-tune our processes and services. From there, we were able to expand with confidence.
Related: 4 Ways to Grow Your SaaS Startup From a Niche Fix to an Enterprise Solution
2. Is my total addressable market big enough?
Your focus should be laser-tight, but your total addressable market shouldn't. An overly narrow total addressable market makes it hard for you or your VCs to get any ROI.
You need to confidently understand the scope of your total addressable market to build a successful business strategy and to be appealing to a VC. Get a fuller picture of your potential total target market by doing deep and ongoing research on your industry, competitor sales information, demographic data and even market conditions to determine what share of the market you could realistically own. Consider WeLab's recent $75 million fundraise; the fintech has not only a clearly defined geographic advantage, but also a total addressable market of millions of savvy customers looking to fully embrace digital banking after the pandemic.
You need to be the expert on the size and opportunity in your total addressable market. Remember the most basic terms: Without enough customers, you can't turn a profit. VCs will want to see that you have an informed and well-defined total addressable market big enough to bring in returns.
3. Am I building products with a defensible moat?
Castles have moats to protect them. Your startup should have a moat, too. VCs want to know you can protect yourself against the competition. All medieval analogies aside, you can think of your moat as your competitive edge, such as proprietary technology or an exclusive industry partner -- something that makes your company distinct.
Related: How to Build Your Competitive Moat
As you might guess, coming up with a strong moat can be tough. But VCs are wise and looking for partners who have something unique to offer. If your tech is replicable, differentiate with endorsement from or partnership with trusted voices at trade organizations or leading influencers. To put it in pop culture terms, you need to find the Joe Rogan to your Spotify -- something or someone uniquely yours.
4. Am I giving customers a reason to stay within my company's ecosystem?
VCs like stickiness. They want to see that you will both make sales and keep your customers engaged for the long haul. That means you need to demonstrate your retention plan to indicate that you've connected all parts of the customer journey from intake to support.
It might seem too soon to map out customer lifetime journeys, but it's not. The more interconnected you can make your solution, the better. A great example is Shopify's recent partnership with TikTok, which pilots in-app shopping for small businesses. As the social network explodes, Shopify is making it easy for its merchants to activate on a new platform and successfully sell on social media. Once a merchant executes a successful Shopify program on TikTok, it will be difficult to change e-commerce providers. That's stickiness an investor can get behind. Your job is to show a similar path to keeping your fans in the fold.
VCs might be especially eager to invest right now, but your competition is up, too. You need to show investors that you're a prepared and self-effacing partner -- someone who's worth taking a chance on. Being able to answer the questions above thoroughly will up your chances of sealing the deal.