This article was written for and first featured in Europe Business Review.
A venture capital investment can offer more than just money. Be clear about what you want and need and venture capital investment could reenergise your company
An impressive amount of energy is being put into new business ideas by UK entrepreneurs. Many founders will eventually need to seek external funding, and some of the doors they knock on may belong to venture capitalists (VC’s).
Yet, UK venture capital investment has fallen during recent years, in a climate which has made exits difficult to achieve, new funds difficult to raise, and where many existing portfolio companies have required further funding at the expense of new investments. How, then, can a company seeking funding increase its chances of success?
Ensure venture capital is the right decision
Any company seeking funding will need to consider whether venture capital is right for it, as it will involve changes to the way the company is run. If the founders see the potential to build a significant company, with a potential exit in three to five years, then venture capital may well be suitable.
For anyone considering venture capital the key questions should always be, ‘why is this the right decision for the company’ and ‘will taking VC increase the credibility of the company?’ The VC firm will be a partner and there is no option for a ‘quickie divorce’.
Getting in front of a venture capital firm
VC’s receive numerous business plans. Getting that initial meeting can be difficult in itself. However, there are some steps which can help.
For example, do your research. Not all VC’s are alike. Many are very sector-focused, especially on technology. Some VC’s will consider very early-stage investments, but many prefer to invest in companies with some trading history. Try to find out which VC’s are active and approach only those who look to be a good fit for your company.
It is also always advisable to try to secure an introduction. If a trusted intermediary can make an approach on your behalf, this may help to ensure that the VC looks at your proposal. However, it is also paramount that you build your own relationships with VC’s. Many VC’s network widely in looking for their next deal. Try to put yourself in a position where you can meet with them and build awareness of your company. Whilst a longer-term play, this can help when the time comes to raise money.
If you have to ‘cold-call’, do it in a way that grabs their attention. Avoid submitting a lengthy business plan. VC’s are time-poor and the chances of it being looked at in any detail are low. It is better to provide a focused executive summary of the investment opportunity. Understand what VC’s are looking for and address those points.
What do VCs look for?
In most cases, VC’s will be looking for the following: strong management; a growing market; a unique product; a business that is a candidate for an IPO or acquisition; and a strong business plan. Make sure that you can tick those boxes.
The most successful pitching techniques
There is still a long way to go to secure those funds, but there are a few cardinal rules which should be obeyed to help your cause. Ditch the temptation to produce a lengthy business plan to the VC. A brief PowerPoint is likely to serve you better. However, make sure that you cover the main points of interest to a VC:
- Introduce the management team. Ultimately the VC is backing management, and will be relying on them to generate returns for it.
- Describe the problem you are addressing.
- Introduce your product and summarise your progress to date most VC’s will be looking for some evidence that the business idea is scaleable.
- Identify your competitors.
- Give your view of the potential market size.
- State how much you are looking to raise; a range can be helpful to allow some room for the inevitable negotiations if an offer is forthcoming.
When it comes to finances, present your historic and projected figures for the next three to five years. These should be presented in a measured and realistic way; VC’s are pragmatic and understand the limitations of forecasting figures.
Don’t be tempted to include overly optimistic and at worst completely unachievable figures you will be found out.
For example, it is much better to focus on lower revenue milestones, which are likely to be of interest to a VC, and more importantly have a good chance of being achieved.
Finally, good luck. Whilst the climate for VC funding is not what it was, there is money available for the right ideas and talented founders, and a little time and effort at the outset can increase your chances of success.