The venture capital landscape is growing.
“Early-stage startups saw $9.3 billion invested across 487 deals in 1Q, bringing the median size of early-stage financings up 36.0% YoY to $8.2 million. Late stage investments totaled $21.4 billion across 538 deals in 1Q 2019, marking the second consecutive quarter in which late-stage capital investment surpassed $20 billion.”
The economic impact of venture capital is undeniable. “Data from the NVCA and PitchBook indicated that VC firms funded US$131 billion across 8949 deals in 2018. That figure represented a jump of more than 57% from the previous year.” While “Three out of the five largest companies in the world received most of their early external financing from VC,” according to Stanford Business.
No matter the magnitude of the potential investment, startups must understand that investors look for a return on their investment. It is a partnership.
What do investors look for?
Many startups are fixated on raising capital, but often neglect the importance of investor return. If you run a startup or small business and seek capital, you need to take the emotion out of it. Focus on how a partnership will benefit potential investors. Be passionate about your company, but combine that passion with an emphasis on investor return. It takes more than a sharp looking pitch deck to secure a deal.
Below is a list of questions you should ask yourself as you prepare to pitch a venture capitalist or angel investor. Some of these questions might be common sense, but you’ll be surprised what can be easily forgotten when an opportunity arises to meet with an investor.
1. What type of business and industry are you in and how long have you been operating?
Be able to clearly explain the business nature of your venture, the industry you operate within, and how you are positioned to succeed within it.
“Start from an established fact about your market. It’s the initial scope. You will then narrow down that scope to lead the investor towards where you are standing now. Draw that funnel in your counterpart’s mind. Make it easy to grasp and straightforward. Then within that market, what problem(s) are you willing to solve?”
2. How much funding are you seeking, and why?
Most entrepreneurs can state how much investment they will need, but few lack a directed and intentional plan on how they will utilize said funds. Explain how you will spend the money, over which time period and the milestones you’ll reach by then.
“Depending on the size of the firm, VCs may write checks as little as $250,000 and as much as $100 million. The smaller checks are typically the domain of angel investors, so VCs will only go into smaller sums when they feel there is a compelling reason to get in early at a startup company.”
3. What are your current sales and future projections?
Know your numbers and KPIs (key performance indicators). “It’s crucial for founders to either understand their numbers or find a co-founder who does (and even then you’ll want to learn what’s going on).” Furthermore, “financial projections work best when constructed as an income statement (also called a profit and loss statement) with a little bit of extra info at the top (number of units sold) and bottom (cash flow). Investors are looking to sanity-check what the entrepreneur is telling them, so we’ll give them enough info to do this at a glance.”
4. Are you seeking capital with an equity stake, or are you simply looking for guidance?
Venture capital is often thought of in monetary form, but it can also be provided in the form of technical or managerial expertise.
5. Where do you see the business in the next five years?
VCs, are pitched by a lot of startups, every day. Every single founder thinks her business is solid gold. So, beyond that, where are you going? Your vision for the future, and ability to share it in a compelling way, will set you apart from all of the other self-proclaimed unicorns.
6. Are there competitors in your space?
“The absence of competition in any given market segment is often viewed as a positive by entrepreneurs, providing them with a clear and straightforward path to success,” says Forbes contributor Chris Myers.
“This belief, however, is as damaging as it is misguided. Entrepreneurs who don’t have competition should be wary. Rather than being a strength, a lack of competition in your market can be indicative of a serious weakness.”
7. What does your target market look like for potential customers?
Know thy customers. Who do you think is most likely to buy your product or service? A well-defined target market (i.e., ideal customers) is more important than ever. Startups and small businesses can’t afford to target everyone.
These are just a few questions you should be prepared to answer when pitching VCs. Keep in mind that you are looking beyond the capital. What are the benefits a venture capitalist receives when partnering with you? Many VCs regularly say no. Give them a reason to say yes.
Sanford Ashley is the founder of VC Direct, a digital media outlet for venture capitalists, startups, and sports entities with a focus on public relations and media distribution. He is also an e-commerce sales trainer and has spent over ten years in media marketing, and two decades in sales and marketing.
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