The main purpose of venture capital (VC) firms is to invest in early-stage businesses in exchange for equity shares or ownership stakes. When these startups grow and gain market value or even become unicorns, VC firms sell their equity to get higher returns on their investment. Although potentially rewarding, investing in startups is a risky endeavour. To minimize the risk, VC firms carefully screen startups before making any investment decision. Startups, on the other hand, can increase their attractiveness to investors by following these 10 steps:
1. Assess the suitability of your business for investment. There are 5 points you need to cover: (1) growth potential, (2) scalability, (3) defensibility, (4) an experienced management team and (5) a reasonable prospect for exit. Many investors would also add the 6th point: traction. It means having hard evidence of market need and product-market fit.
2. Choose the right VC firm. Before creating a VC wish-list, research each firm’s objectives, preferred location and market segment. Study each VC firm’s website carefully, especially their portfolio and approach. Try to draw parallels between the firms they have invested in and yours. This will help you estimate the chances of getting funded.
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3. Define the unique selling points (USP) of your business. One of the most valuable assets of any business is its uniqueness or something that distinguishes it in the market. Whether it is being the only firm offering a particular product or service, or doing business best, it attracts the attention of investors, and helps secure funding.
4. Develop the deal. Not only do you have to develop your business, but you also have to design an attractive investment deal. Investors appreciate working with “founders who know how to put their due diligence materials together and who have working knowledge of a term sheet”. These concepts are not too complicated, but familiarizing yourself with the process takes time.
5. Target the right market. Before investing, VC firms analyze the market they are investing in depth. When approaching a VC firm, startups need to prove that the market they are targeting is worth investing based on data and that the investment will generate considerable revenue. To get this information, founders need to analyze the entire market size (the top-down approach) as well as the actual market size for their firm (the bottom-up approach).
6. Have the right team. Early-stage investing requires dealing with a high degree of uncertainty. The risks could be mitigated by having the right team: if team members have complementary skills and subject-matter expertise, and have been successfully collaborating, the startup has a solid chance of attracting some VC.
7. Stay in touch with investors. Raising capital is a challenging task. To succeed, you need to remember that “raising is about maintaining the relationship with investors for, after and during the raise – not just during the raise”, observes Olympia Yarger, Co-founder of Goterra, a waste management startup. This will ensure that investors are updated on the progress of business development, which in turn can retain their interest in the venture.
8. Build trust and credibility. You need to build relationships with investors long before fundraising. Think of many touch points to build trust over time. For example, tell an investor what you are going to do. Then come back 6 months later and show him / her what you have accomplished. Your commitment will help gain a reputation as a reliable entrepreneur.
9. Patent your intellectual property (IP). If your business is based on new technology or a new / improved process, file for a patent before looking for investors. A patent attorney will help you find out if your idea is too close to some already patented idea or insufficiently unique to qualify for patent protection. Also make sure that no one else has the rights to your idea.
10. Understand your exit strategy. VC firms seek a return on their investment. They need to clearly understand how they could exit your firm. Make sure to articulate your exit strategy to potential investors so they would know how they could monetize their investment.
References: Sarath CP, hackernoon.com | Tim Berry, articles.bplans.com | Harper James Solicitors, How to Secure Venture Capital for your Business | Luke Davis, growthbusiness.co.uk | dummies.com | 7startup.vc | Iris Lee, techinasia.com | Mark MacLeod, inc.com | upcounsel.com | fastercapital.com