If you’re seeking funding from Venture Capitalists (or “VCs”) there are certain things any company director needs to know in advance:
- VCs are not scared of risk. In order to provide an adequate return to the VC’s own investors, they seek companies that have potential to be game-changers, even if there is meaningful risk associated with the opportunity. VCs are less interested in gaining a 10% market share of a sizable market and much more interested in a company that changes the way business is done in a market or that even creates a new market.
- Get the details right. A bad initial impression can easily be the end of your relationship. Many venture firms receive hundreds, if not thousands, of executive summaries and business plans each year. Plus, VC’s frequently talk to one-another so, if one has a concern about the quality of a company, it is quite possible that others will soon hear about it.
- Different VCs have different preferences. What stage of company do they prefer? What is their industry focus? How much do they typically invest? How much capital do they have available for investment? Do they already have a competitive company in their portfolio? These are questions you’ll need to answer before assessing whether you’re a likely match.
- Never ask a VC to sign an NDA. Asking a VC to sign a non-disclosure agreement (“NDA”) is one way to be left out in the cold.
- VCs are looking for “must have” products. VCs want to invest in companies that offer products and services that are disruptive and indispensable. Therefore, it’s key to make sure you are seen that way.
- Give the VC some comfort. Most VCs are not willing to invest without a substantial basis for believing that the offering will be accepted by the market. So it’s important to have established commercial acceptance and to be seeking funds solely to scale the effort. If you have a customer, partner and/or investor that the prospective VC respects, even better.
- Show them a short and highly profitable path. VCs want to see a well-developed, clear path to profitability, and the shorter that path is the better. VCs want “capital efficiency” as they are concerned about having to sink endless sums of money into companies. A good commercialisation strategy is more important than the world’s best widget.
- Ask for what you need. You don’t want to approach a VC and ask for less than you need to achieve milestones that drive valuation in a meaningful fashion. If you ask for too little you might not get any funding at all.
- Ask a trusted advisor to introduce you. You are competing against so many proposals. Give yourself the best chance by asking your accountant, lawyer and banker to make introductions on your behalf.
James Richardson is a director at Metric Accountants, which specialises in helping Technology and High Growth Companies.