If you’re an ambitious founder looking to scale, sourcing venture capital (VC) investment is likely to be the best route to making that happen. But, for the uninitiated, the VC industry can seem shrouded in a kind of mystique. Knowing where to start and what to expect can be daunting, to say the least.
You might picture something akin to a Dragon’s Den pitch; an energetic and passionate entrepreneur presenting cold to a panel of stern, unimpressed investors.
The reality, however, is much less dramatic. Unlike on TV, you won’t leave your first meeting with a signed contract in your pocket. Although, on the plus side, we are usually much friendlier!
The truth is that wooing VCs requires hard work and patience, often taking as long as 12 to 18 months from introduction to finalising a deal – and rightly so.
Partnering with VCs means effectively choosing a business partner for around the next 10 years of your life; people you can work with through all the ups and downs of your startup journey. So, it makes sense to do it properly.
Here are a few pointers on what to expect and how to maximise your chances of success:
Is VC really the right option?
Before you go any further, it’s worth making sure that venture capital is really the best solution for your business.
VC should be seen as rocket fuel for extremely high growth businesses with a large market opportunity and founders that are hyper-aggressive in their expansion plans. Most businesses are not like that, and that’s okay.
Not every business needs to change the world, scale internationally or achieve 500% revenue growth year on year. But if you attract venture, that’s what you’re signing up for.
Finding the right fit
If you decide you’re all in, the next step is identifying your targets.
It’s in the interest of both sides to ensure there is a fit in terms of industry, skills and stage of business, as this enables the VC to act like a true partner in contributing advice, contacts and experience to the growth of the business.
So, do plenty of research before making any approaches, considering which firms are the best fit, based on their expertise, past investments, funding stage and geography.
Getting over the first hurdle
VCs are overwhelmed with approaches – it’s a job in itself to just manage the pipeline of opportunities we have coming through. We place a high value on relationships so cold approaches are usually less successful than if you’re introduced through a mutual contact.
Any generic pitches that look like they’ve been sent out in bulk to every VC are almost always non-starters.
Tailor your approaches and always get an introduction if possible.
Take your time
Choosing a funding partner is a two-way street. As well as aiming to impress in your initial pitch meetings, you also need to gauge whether the investor is right for you, asking questions around their investment philosophy and approach.
It helps enormously to raise funds before you actually need them, so you have the breathing space to weed out those investors that you don’t have a good feeling about, who can’t challenge you and the business, or don’t demonstrate the ability to help.
If both sides make it over the initial hurdles, you’ll be taken through a funnel towards potential investment – this is the most time-consuming bit.
When assessing companies, we come at it from two angles. At the fundamental level, we have to get into the data and analyse the company offering and the market opportunity. As experienced VCs, we also rely on our gut feel and knack for what could work and succeed.
Building relationships and trust
A key part of the funnel is also looking at the qualities of the founding team, to check that the chemistry is right and whether you’re people we can work with.
Relationships are everything to VCs, so we want to spend time with you and your team to analyse how you work and similarly we expect startups to invest time in getting to know us and finding out what makes us tick.
It helps to make contact as early as possible and keep us posted on how things are going throughout the process – even if that means a three-bullet-point update every two months.
Make us feel “part of a journey”, even before we’ve invested. Trust is a critical part of this. VCs hate surprises, so be honest about any challenges you’re facing. We will always find out eventually.
And if you make it through all that, the last stage is to do our due diligence around the technical, accounting and legal aspects. In most cases this is just confirmative that we’ve made the right decision, so we try to make it as streamlined as possible.
However eager you are to get those funds through the door, securing VC investment requires planning, patience and must be part of a long-term strategy.
Having said that, the VC market is on the up, which means it’s a great time to raise money. Just ensure you give yourself plenty of time to find the right partner and use the process as a valuable learning experience.
Any rejections and feedback you receive along the way are hugely valuable to address any issues and ultimately build an even better company.
Denis Shafranik is a partner at Concentric