For any startup looking to scale out globally, obtaining funding is one of the most critical challenges. There are several key factors to take into account when preparing for that all-important first pitch.
Entrepreneurs should aim to know as much as possible about the VC firm and partner they are pitching. Even within a specific firm, different partners have different expertise, so make sure you do your homework and read biographies, blogs and recent tweets.
Entrepreneurs should ascertain whether the sector is something that the potential investor is passionate about and has experience in. Tying the pitch to the areas of interest for the partner and the fund improve the likelihood of a deeper engagement from the first session.
When making initial contact with a potential investor, entrepreneurs should avoid cold calling, if at all possible. Use LinkedIn to discover mutual contacts, such as an entrepreneur whom the investor has already backed.
This mutual contact could then make the introduction. Each VC firm receives thousands of business plans each year, so a personal reference or validation will go a long way to setting an entrepreneur apart from the crowd.
What VCs are looking for
There are various elements a VC investor will consider with any new business pitch.
Firstly, whether or not an entrepreneur can articulate their idea and business model well. Secondly, whether or not they have the requisite technical and operational experience to carry out their plans.
Thirdly, the investor will look at the market size to determine capacity for more competition. If the space is ‘wide open’, this can be a cause for concern in itself.
Finally, the VC will ask why a business is looking to raise a specific sum and how they plan to invest the money. I often ask an entrepreneur how the business plan metrics – such as the number of users, the revenue, and the company growth – would be impacted if we were to invest double the capital the entrepreneur was initially seeking to raise.
After the initial pitch, entrepreneurs should avoid letting any seeds of doubt take root in the VC’s mind. As such, if the VC has asked for clarification on a specific point – for additional data on mobile usage, for example – make sure to respond promptly to the request.
Minimise the risk
The business of Venture Capital is also known as Risk Capital; the aim is to collect as much information as possible in order to minimise risk when investing, any doubt simply increases the risk.
The process gets more complex as the funding amounts increase. Angels might be willing to deploy £50,000 based on one meeting and seed-stage investors might commit to £250,000 after a pitch to the whole partnership and some due diligence.
Once the target funding reaches £1m, the VC will want to do more thorough due diligence and have more in-depth conversations with the team, clients, advisors and other people they know in the space. Once again, it’s about minimizing risk for the VC.
The term sheet is the next major milestone as it signals that the VC is serious about investing. It is not, however, a guarantee. There will still be additional due diligence checks and legal obstacles to navigate. Orrick, Taylor Wessing and Tina Baker at JAG Shaw Baker are some of the best advisors for this.
Once the capital is received, it is key that entrepreneurs do not become complacent, as this is merely the start of their journey. The money must be converted into operations, marketing, engineers, growth and execution.
A last word of advice: choose your Partner wisely, do not take the biggest check or the highest valuation. Realize that you will be closely linked with this firm and specifically the partner for a long time, through good and bad.
Christian Hernandez Gallardo is co-founder of White Star Capital and former Director of EMEA at Facebook.
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