How to Impress a Venture Capitalist
Venture capital funding declined from $29.4 billion in 2011 to $26.5 billion last year, according to the National Venture Capital Association. However, that’s still a big pot of gold for fortunate entrepreneurs who are looking to take their businesses to the next level.
The truth is, there will always be money available to companies that show promise. But with so many enterprises seeking funding, standing out in the crowd can prove difficult. Here’s how to dazzle venture capitalists.
Identify the Fund and the Partner
Many types of VC firms invest in a variety of industries and at different dollar amounts. Figure out the firms — and the particular partners within those firms — that invest in your space and in the amount you’re looking to raise, says Justin Hovey, a partner with the law firm of Pillsbury Winthrop Shaw Pittman.
Are you looking for seed capital, accelerator services, a classic Series A round, or something different? Do your research on the firms, then drill down and approach the actual partner who is interested in your space. You can start by searching NVCA’s membership directory for leads.
Get to Know Potential Investors
Don’t waste your time cold-calling VCs or emailing your pitch, because these approaches do not work, Hovey says. Establish a relationship with partners you plan to approach long before you start looking to raise money.
For example, get an introduction through a mutual contact and ask for an informational meeting (without a pitch book). Follow the partner on AngelList.com and Twitter, Hovey suggests. Retweet some of their tweets, so they know you’re following them. Let them know about your product launch, and, if applicable, offer them a free subscription to your service or a free download of your app.
Help potential partners get to know you and your product or service, so that when it’s time to actually raise funds, you’re calling on partners you know — or at least know you, Hovey says.
Demonstrate Your Knowledge
Venture capitalists will expect you to have thoroughly researched the market’s interest in or need for your product or service. Arm yourself with facts and figures, including information about similar products or services already on the market; your major competitors and how your product or service is like and/or differs from their offerings; and the degree of strength in the marketplace enjoyed by your competition.
“Degree of strength” is based on how established they are, what portion of the market they command, the loyalty of their customers, the nature of their customers (compared with those you aim to attract), and more, says Billie Blair, president and CEO of the consulting firm Change Strategists.
Realistic, credible numbers — projections of what your company can do, what the market really is, and where it will go — are key. Market size and growth rates are incredibly important statistics for investors, notes Lakshmi Balachandra, assistant professor of entrepreneurship at Babson College. “They recognize made-up numbers,” she says. However, you don’t want to underestimate your company’s potential, either.
The best financial projections are straightforward and provide insight into the underlying business, says MIT consultant Jeremy Macdonald, who contributes to its Executive Insights Blog. Keep them simple by presenting a five-year plan that shows key drivers of revenue (number of customers, average selling price, etc.) and costs (head counts, costs of goods sold, sales and marketing expenses), he adds.
Showcase a Strong Team
“People invest in people. As such, when meeting with venture capitalists, demonstrate that you have a solid, cohesive management team,” says David Barbash, a partner in the corporate department at Posternak Blankstein & Lund.
Offer a good sense of your team — who they are, what their backgrounds are, what they can do, as well as what they need in order to make their goals. “Provide a complete picture of your team and your capabilities,” Balachandra adds.
Have “Skin in the Game”
If you’re asking for money and you haven’t put up significant funds of your own, don’t expect a venture capitalist to take you seriously.
Says Blair: “They absolutely demand that there’s good demonstration of the use of your own money, like mortgaging your house or funding from friends and angels, to launch the business and nurture it along toward proven marketability.”