Nowadays, there are plenty of opportunities to raise capital. But how do you really attract Venture Capital? - Here we’ll reveal the “5 hooks to get the sharks”!
You want to raise capital? Nowadays, there are plenty of opportunities reaching from “traditional” private equity to venture capital to crowdfunding - which now has become even a larger source of startup financing, growing at a phenomenal rate, such as the newly emerged ICOs (Initial Coin Offerings).
However, unlike Private Equity firms (PE), which mostly buy or invest in mature companies, that are already established, Venture Capitalist (VCs) typically invest in 50% or less of the equity of the companies (vs. percentages allowing for total control of the company), invest $10 million or less in each company (vs. $100 million and more) and deal with equity only (vs. both cash and debt).
To attract venture capital, you have to keep in mind, that VCs determine a company's true value and potential through rigorous and dispassionate due diligence (unlike many ICO investors…). It’s all about the fundamental question: Will this investment make money for their investors? So, here are the 5 hooks to get the sharks:
1) Target a lucrative market with huge growth potential: To attract VCs, your market needs to be at least $1 billion. VC firms need high rates of growth, therefore they look for businesses in market segments, having the potential to grow to $100 million in revenue and beyond. If your company can’t offer this then they won’t be interested in investing in it.
2) Address a big market opportunity: Your product or service should be innovative and market disruptive, aiming to solve a major pain point within its industry and having the potential of being a $100 million company that captures a significant share of the market.
3) Build product traction and differentiate yourself from your competition: You have to demonstrate some degree of traction for your product or service among customers, meaning you must have at least a working Minimum Viable Product (MVP). Not knowing who your two or three biggest competitors are and how you will sustain your competitive edge makes you look foolish.
4) Build a top-notch team: A good management team is a decisive factor, as VCs won’t be involved in the day to day running of the company - such a team ideally has a track record that includes developing a high-quality technology product and a sales and marketing machine at a former company.
5) Clear exit strategy: VCs dedicate up to 50% of their due diligence to study how they plan to exit - as a founder, make sure you’ve asked them before about their exit intentions…;-)
*Only if you need outside money to scale - if you can grow quickly and maintain profitability, you may want to rethink giving up equity to an outside investor. ;-)