Not all companies need venture capital to succeed. As scholar and former VC Dileep Rao points out, “The reality is that most ventures do not qualify for venture capital and never will.” However, a highly scalable business shouldn’t necessarily avoid raising capital. In fact, many successful companies have grown to fruition because of it.
Ultimately, your company’s success in securing capital depends on market size and opportunity, the founders and team, and your product-market fit.
Find a great market opportunity
How well do you understand your market size and potential? Research your desired market thoroughly and analyze the data. Use widely available tools and resources to conduct market research. A great market has many potential customers willing to spend money, is already large or rapidly expanding, or has a fragmented customer base with little customer concentration.
At Shiftgig we focused on an untapped market: over 90 million U.S. hourly workers. We’ve strived to create a place for them to find better employment. As Uber has proved, mobile technology can give hourly workers access to information instantly so they can work when they want. In January 2014, after speaking to many potential clients, we pivoted from a web social network to a mobile marketplace. Prior to this, we were growing exponentially, but not virally. Ultimately, client demand drove our decision to pivot the business.
Listen to your clients when you make these types of vital decisions. After the shift, we rigorously measured our customer acquisition costs and lifetime value metrics. Many of our investors supported the company because of the early financial metrics and the large market opportunity. Take time to measure this type of data for potential investors.
Find strong co-founders
Venture capital firms seek out exceptional founders. The best founders have a combination of domain knowledge, vision, and the ability to build and sell a great product. During my decade at OCA Ventures, I met over a thousand passionate entrepreneurs, founders and management teams. Our best investments were with teams that knew how to execute, often by selling. They sold their vision: to angel investors, early team members and even beta clients before the product was built.
The same traits that make great salespeople often make great founders. My own co-founders have passion and grit. Find partners who have similar values yet different functional skills. To find great co-founders, network diligently and don’t be afraid to share your idea. Be comfortable having candid and open conversations about roles and responsibilities from the beginning.
Prioritize product-market fit
Do users buy your product as fast as you can make it, or are sales cycles long and word-of-mouth ROI low? If it’s the former, you might be a candidate for capital. As an investor, I would often monitor a sales pipeline for months or longer to see how many clients actually closed. It would clue me into the company’s product-market fit before I decided to make an investment.
In addition to these three factors, timing is an important consideration when raising venture capital. It’s not a sensible practice to raise money when you are low (or out) of cash. Instead, wait until a venture capital fund is at the beginning or middle of a fund cycle and actively looking to invest. Also, be conscious of the time of year you decide to dedicate to raising funds. Summer months and certain holiday winter weeks might be slower, as key investment partners might be out of the office.
When you’re seeking a venture capital partner, remember that they will be intimately tied to your business. Someone who understands your business’ domain can add ongoing value. Make sure that your potential partner stands behind your vision and mission.
The financing process can be long, hard and not the right path for most businesses. However, if you have the right strategy coupled with the right capital and partner, an amazing growth business could be the storybook outcome.
Eddie Lou is the Executive Chairman and co-founder of Shiftgig, the leading marketplace connecting businesses with shift workers.