13th December,2016: Yesterday morning, I received a call from an…
You have a great product which is the origin of your business idea. Your friends think it is innovative, and family is supportive. The initial funds you invested as seed capital are helping you gain momentum in the business. All the signals are flashing to indicate that it is the right time to raise funding from a big banner venture capital (VC) fund and go for the Series A round.
Take a step back and think again. The manager in the VC fund is not your friend and he/she scans at least a thousand pitches a month. It is your responsibility as an entrepreneur to make the best of the 45 minutes meeting that a fund manager might agree to.
It is true that you need to be a great storyteller to raise funding, but it is equally important to be a realistic one. Do not be fictional or driven by fantasy when you decide to take the plunge and raise the first big ticket funding. Here is a quick hygiene checklist for startups to keep in mind before even considering meeting a venture capitalist to raise funding.
“You’ve got to start with the customer experience and work back toward the technology, not the other way around.” — Steve Jobs, Former CEO, Apple Inc.
The most common mistake made by entrepreneurs is to not know who exactly the customer of their product is. “Everybody is my customer” sounds glorious but it will not help you to raise funding. Before reaching out to the VC, identify a market, reach out to potential customers and make them familiar with your idea or product. Be very clear and have reasons that why you are solving a particular problem through your business idea. Is it even a problem for your customers? Are they willing to pay for it?
Proof of Concept
Once you have identified your customers, the next step is to collect proof of concept. VCs are a big fan of data and evidence to prove the worthiness of your idea. Take feedback from customers and show how you incorporated it for better results. Make a track record of how you have been achieving goals, utilizing your seed capital. You could be a potential catch of the VC if you already have a 100000 customer base who are using your service to solve their problem. List the recent customers or big clients you have won. Give reasons how they will help you gain more customers in the future.
Updated Financial Records
Since you are ready to raise funding from a VC, it is presumed that you must have been smart with managing money in the past and must have put the seed capital to optimum use. Ensure that your P&L account is clean, cost is justified, income is put in the right investments, and profit margins are intact for the last 12 months. You will seem like a serious company if you have policies and procedures in place, taxes paid in time and legal documents verified.
Strong and diverse team
Many investors invest in people and not just the idea. It might be easy to get a brilliant idea, but execution of that idea through the wrong leadership can take a toll on the startup. The question an entrepreneur needs to ask himself/herself is that is he/she the best person to solve this problem? If not, you must have co-founders or a leadership team which is the right mix and brings varied expertise on the table. Find a marketing expert if you are the tech savvy founder or vice versa.
Funds look for companies that have a team of co-founders from diverse fields such as technology, marketing and finance. Collaborate with strategic partners who can add value to your business. If you are unable to do so due to lack of funds, share with the investors that it is high on your priority to hire industry experts. If possible, share a unique hiring policy or examples of your great working culture. You cannot raise funding for an organization that does not invest in the right people and more importantly does not retain them.
Don’t be desperate
Have a long term plan before you decide to raise funding. Getting a VC on board to put funds in your company is not easy and one should be well prepared for this time consuming process. Have a Plan B ready to manage your business for the next 18 months if you are unable to raise funding in the time frame you have in your mind. This is a trait of a good entrepreneur and sharing it with a VC fund manager might help. Being a good planner will get you brownie points.
One shoe does not fit all
The pool of VC funds is huge. Each of them is looking for something unique in an entrepreneur that merges with the funds ideology. Likewise, every investor will not work for your organization. A practical method would be to make a list of all VC funds whom you feel would be interested in investing in your organization, many of them are sector specific. Start contacting them from the ones that are least in your priority. As you keep going up in the list, constantly incorporate feedback and suggestions from all fund managers before meeting the next one. Keep all these investors updated about your business development even if they have not shown much interest in your idea. Have a customized presentation for each investor.
Clarity of vision and goals
Don’t raise funding of a high capital just because it sounds fancy and glorious in media. The more funds you raise, the more equity you will have to sell. It is important to know whether your company is ready to absorb so much funds and that is also what VCs are keen to know. Be specific while talking about your goals or listing them. For instance, rather than saying ‘I need x amount for a marketing plan’, be objective and mention that you need to acquire x number of customers in a specific market through marketing and branding. Make a growth trajectory that how much investment will yield what percentage of growth in which area or vertical of the company and in what duration of time.
However, there is no single formula which will get you a Series A deal. As an entrepreneur, you should focus on making the right mix of the above mentioned aspects.