How to Raise Venture Capital
When starting your business, access to funds and ongoing financial support will be key to your success. One of the more lucrative funding options is to secure venture capital from either individual investors or venture capital firms. Typically, venture capitalists invest more money because they anticipate a higher return. However, venture capitalism isn’t for every business.
Let’s examine the different steps you should take and the criteria you should meet to raise venture capital.
Develop a Pitch Deck
The first thing you must do is create a solid pitch deck to present to potential investors. A pitch deck is essentially a PowerPoint presentation based on your business plan, and it will be the foundation of your funding efforts. The greatest business ideas will get nowhere without a deck that clearly illustrates the company’s potential for growth. While best practices will vary depending on the industry you’re trying to break into, there are a few basics that all pitch decks should follow.
The first thing to remember is that your deck shouldn’t be too overwhelming. In his book, The Art of the Start, Guy Kawasaki advises entrepreneurs to stick to the “10/20/30 rule of PowerPoint,” meaning your presentation shouldn’t have more than 10 slides, take longer than 20 minutes and have fonts smaller than 30-point. Beyond that, it should lay out your company’s basic information, its business model, your management team and marketing strategy. You should also outline the problem that your product will solve, your competition and financial projections.
Remember that the most important thing an investor is looking for is a relatively quick and large return on investment, and this means communicating your potential for fast growth. To understand this potential, investors look to three aspects of your company’s pitch when judging whether or not to put capital into your brand:
- Your market potential
- Your management team
- Your product
Let’s take a look at the best ways to highlight these aspects in a pitch to hopefully gain VC interest.
Outline Your Potential Market Share
This will require a lot of tedious market research on your part, but if your figures can prove there’s room in the market for your product (because you found a need no one else has or improved an existing product), you’re in good shape. If research proves that your product is so innovative that you’ll need to open up an entirely new market, you might be in even better shape, as long as you can prove that the market for your product exists.
You can find estimates for your entire market through SBA.gov, FedStats.gov, various industry associations and other research groups. Initially, you’ll get an overwhelming figure. For example, if you want to start a website that offers bespoke suits at relatively inexpensive prices, your market will be all males in the United States, which will be an imposing figure. From there, you could eliminate the wealthy who have their own tailors or prefer established brands, lower-income men who can’t afford a bespoke suit, those in industries with lax dress codes, etc. until you narrow it down to a succinct target market: i.e. entry- and mid-level professional men in their 20s and 30s.
After that, you will need to research your competitors and figure out what the demand will be for your specific product. Do this by finding out their annual sales and the portion of those sales you think you can poach, whether through selling a superior product or simply targeting your product more specifically. Reach out to a large number of consumers who buy similar products, and survey them to see if they’d be interested in buying your offering. As a good practice, split the percentage of people who express interest in half (sincesaying they’ll buy doesn’t translate to actual sales). That’s your potential market share.
If this potential market share is significant, it’ll increase your chances of gaining investments, particularly if you’ve already proven consumer interest. If it’s tiny, then it’s time to get back to the drawing board and develop a product with broader appeal.
Develop a Great Product
Your product is the most important aspect of your VC pitch. VCs want to invest in proprietary products, so if you’ve already protected your product or technology with a patent, copyright, trademark or other IP right, you’re at a distinct advantage over others.
But while that’s a plus, VCs still want to see more. What they really want is a truly unique product, one that opens up a new category or clearly improves upon what’s currently out in the market. Innovative products ensure growth opportunity, and as stated above, that’s what VCs crave the most. Your product must have strong enough differentiation to overcome established competitors with more distribution, bigger customer bases and higher marketing budgets. The fewer barriers to entry in the market, the better.
To see how to well your market will receive your product, develop a minimum viable product (MVP), and offer free trials or discounts for early adopters to test it out. Get their feedback, and implement improvements as you see fit.
Assemble a Winning Team
Without the proper people at the helm, the greatest products will fail. As such, VCs will want to check out your team and your ability to lead them during growth phases. The influx of cash brought in by a venture investment will ramp up all aspects of your company’s operations, and VCs will want to see that you have experienced that influx before and are prepared to handle it again. Unfortunately, this means you’re at an advantage if you’ve landed investments before, but are at a significant disadvantage if you haven’t.
If this is your first time seeking investment, however, don’t fret. Your ability to build and lead a passionate and resilient team can help VCs overlook your lack of previous investments. What they really want to see is that you’re goal-oriented and aren’t afraid of failure. It’s also important to make sure that the people on your team have the right expertise (for example, if you’re launching a food startup, it will look a lot better to have someone on your team who’s owned a restaurant or been in the food industry for some time).
Investors want to make sure you have an exit strategy that will be lucrative for both your company and the VC, and they need to know that you have the knowledge and experience required in order to reach that goal. They want you to be open to drastic changes if necessary, and they want to make sure you can prepare and lead your team during those changes.
If your team is tiny or you’re a one-man or -woman operation, you may want to hold off on seeking VC funding. You need to get your company off the ground before seeking venture capital to take you to the next level.
Find the Right VCs
This is perhaps the trickiest part of your search for venture funding. It’s not smart to simply send out a pitch deck to 50 random VCs in hopes of grabbing their attention. You need to do research, contact other funded startups in your industry and seek out referrals. But first, let’s cover the basics.
There are two types of venture capitalists. One simply offers cash, while the other (called a “strategic investor”) brings money as well as contacts, industry expertise and market knowledge. Cash is great, but landing a strategic partner that will help guide your growth is even better. That’s why you don’t want to reach out to just any investors; instead, you need to identify the big players in your industry and hustle to make contact through referrals. Know what stage your business is in, and find an investor that has propelled similar brands to the next level.
The best way to find these strategic investors is through face-to-face events. Attend local meetups and industry events, as these oftentimes feature speakers and booths that can help you find a prospective investor. Seek out similar brands and ask about their funding, then ask for a contact. A good rule is to never leave a meeting or a conversation with a C-level industry colleague or investor without asking for a VC contact. While this might not always provide a good lead, all you need is a single great one that actually works out.
There are also a number of online resources that can help you find funding. The Small Business Administration, for example, has a Small Business Investment Company Program that’s designed to help startups find investors that specialize in their industries. The National Venture Capital Association is likewise a good resource to find investors and VC groups, and Gust.com (formerly Angelsoft) provides a list of VCs that can be contacted directly through the site.
But again, don’t simply toss your pitch out to whatever contacts these sites provide. Instead, research the VCs and see what companies they have invested in, and reach out to C-level leaders of those companies to get their take on these investors; if you like what you hear, ask for a referral and direct contact info for the investor, or you can simply mention that you talked with these business leaders when you contact your prospect. Letting the VC know that you did your homework and went out of your way to learn more about them will assure the VC that you’re serious about your business and about getting funding, and that’s a plus when seeking investment.
When you finally make contact with the VC, send them your best elevator pitch and request a meeting. After that, the last step is to hope he or she responds positively and that you can become one of the very lucky minority that actually lands venture funding.
Know Your Options
If venture capital isn’t right for your business, don’t worry. There are other options, such as small business loans, crowdfunding and more. It is possible to get financial support for your business from a variety of different sources and bypass the VC route.
Keep in mind that a very, very small percentage of new businesses receive VC support every year. It’s not impossible, but it is a route that takes an extraordinary amount of effort to be successful, and even with that effort, you have to realize and be open to the fact that it’s likely you’ll fail your first time, at which point you’ll have to dust yourself off and try a new approach.
Nick is an in-house editor at Docstoc. He's a graduate of Cal State L.A. and a Pasadena hockey legend.