Startup Funding Options: Should You Consider Venture Capital?
Turning your innovative idea into a thriving startup requires more than just passion and a good plan. It demands a strategic approach to funding, and understanding the different avenues available is crucial. In this article, James Phipson helps you identify if venture capital (VC) is the right fit for your startup.
The truth is that raising venture capital is the same as any other complex sales process these days. It’s not easy but it no longer depends on having the right connections or going to the right school or university. It’s time-consuming, requires preparation, hard work and a little bit of luck.
However, if you have the right product (for venture capitalists) and work hard at it, you should get there, although there are no guarantees. There is no special trick to raising venture capital. If you would like one, it is the same as the trick for all sales processes. Try to put yourself in the investors’ shoes. This means bearing two critical factors in mind:
KEY FACT 1:
THE 80:20 OF VENTURE CAPITAL
As with all jobs, there is an 80:20 to venture capital investing. If you know and keep those rules in mind, it will make the whole process far faster and more straightforward.
Good VCs will focus on answering the vital few questions, the 80:20 of investing.
Different people construct these questions in different ways but they generally boil down to:
Why this Business?
Have you built or are you building a compelling solution to a big problem?
VCs need to believe that if things work well, then they will have a stake in a very valuable business. They might choose to back 1 out of every 250 businesses they see, with the hope that a single investment might return up to the total value of the fund.
Therefore, you need to credibly paint the picture that not only is success inevitable, but that there is a big opportunity if you are successful.
Why this Team?
Are you a strong, ethical team who can execute rapidly to seize this opportunity?
They need to believe that the team is made up of high-quality people with relevant experience. That gives the best chance of executing rapidly on the opportunity and of figuring out the inevitable challenges that the business will face as it grows.
In short, if you have answered question one appropriately, it’s now about convincing the VC you are the right team to build the solution to the big problem.
Why Now?
Will you be able to grow your business rapidly if you execute effectively?
Great businesses are in the right place at the right time. Is it the right time for your business?
For example, YouTube in 2000 would have ‑flopped as broadband penetration was far too low. YouTube in 2010 would have been too late. Someone else would have grabbed the opportunity. It was founded in 2005, which was the right time for the business and evidently, with the right team.
Why is now the right time for your solution to the big problem you have identified?
Realistically, venture capital is designed for a small number of business, meaning it's not for everyone. If it isn't right for your company or idea, getting backed by a VC could hurt rather than promote the development of your business.
However, if you can answer these three questions confidently and convincingly and your reasoning is defensible in the face of questioning, then VCs need you as much as you may need them - so it should be a relationship of equals.
KEY FACT 2:
VENTURE CAPITALISTS SEE A HUGE NUMBER OF DEALS - BUT DO VERY FEW
A material part of a VC’s job is to generate deal flow. They want to see as many deals as possible from as wide a range of sources as possible. Ratios of 250 deals seen to each one they invest in are not uncommon.
However, assessing and dealing with this level of deal flow is very time-consuming. Having taken the time to generate a huge number of deals, ironically venture capitalists are then always looking for reasons to say ‘No’ as quickly as possible. Quick ‘No’s free up their time to focus on the small number of deals that might genuinely be a good t for them.
The other side of this coin is that ‘Yes’ is only a ‘Yes’ to the next stage in the process, nothing more. When they say ‘Yes’ they are agreeing to invest more time understanding your business. So given that they are seeing so many deals you need to make saying ‘Yes’ to yours very, very simple for them.
CLARITY AND BREVITY ARE KEY
The VC due diligence process is detailed and goes on for a number of weeks.
You don’t need to tell them everything in a first meeting. They wouldn’t be able to absorb all of that information in one meeting even if you tried. In a first meeting, you need to offer enough detail on the key points to get a ‘Yes’ to you moving to the next stage. This means that you need to think carefully about the key points that you want to communicate and ensure that they are crystal clear.
Early in the process, keep it brief and relatively high level. As things progress go into more and more detail and your key points will become more tactical. Give them the appropriate amount of detail for the stage of the process that you are at and answer the types of questions they will be asking themselves.
Exploring Other Funding Options
Remember, VC isn't the only funding game in town. Explore other options like:
Bootstrapping: Funding the business yourself through personal savings, revenue, or loans.
Angel Investors: Wealthy individuals who invest in startups at an early stage.
Small Business Loans: Traditional loans from banks or government agencies.
Crowdfunding: Raising capital from a large number of people through online platforms.
Carefully consider your funding options and choose the one that best aligns with your specific business goals and risk tolerance. If your business requires further fundraising advice, please book a discovery call below with one of our business advisor at Dragon Argent.
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