How to prepare a startup for venture capital?

How to prepare a startup for venture capital?

Do you know what percent of startups raise venture capital?

Research shows only 0.05% of startups raise venture capital. Since companies do not prepare well for the funding, they get rejected. Common problems most entrepreneurs have are: they do not have management experience, their business plan is only a simple prototype, and they need to raise capital for which they need VCs to invest in their startup. They must know all the ins and outs of their business before starting the meetings, as the investors must be sure of their benefits.

advantages of venture capitalists

Now, how to get funding from venture capitalists? Here are 10 things you need to prepare before the meeting

Company Valuation

The valuation of a company is the pre-money valuation. It is the value of the company before additional capital is invested through Venture Capital. For example, a venture capital investment is $10 million, and the pre-money valuation is $40 million. It means that the post-money valuation is $50 million. The most common range of valuation for early-stage Venture Capital is between $1 million and $5 million. Some factors that determine valuation are:

  • Size of the market
  • Technology owned by the company
  • Company’s growth rate
  • The efficiency of the company’s business model.
  • Economic conditions around the globe

Startup Pitch

For raising Venture Capital, it is essential to have a perfect pitch deck. It shows the investors that you are serious about the business idea. Including a marketing communication plan showing the problem you will solve and how and why you are doing it will deliver a clear picture to the investors.

Prior Investment

As a startup, if you can raise some money from your friends, family, and fools (FFF), it gives a positive signal to the investors. They can analyze how the first capital was used along with the results.

Source: Crunchbase News

A good team

One of the core grounds for a successful startup is a good team. Any VC will meet the team members after deciding to invest in your company. They evaluate how the members define and plan to solve the problems the product is likely to face. Having experienced but talented members can bring additional points to your business.

Protecting the Intellectual Property

Every business idea is either a new or improved version of an original. Filing a patent before looking for investors protects your intellectual property. Also, no one should know about your idea before it qualifies for patent protection, as it can either restrict or eliminate the process.

Target Goals

What is it that you wish to do with your business idea? Do you want stability or do you wish to own a multi-billion company? Would you prefer being a sole proprietor or are you looking for business partners? Venture Capital generates huge returns. They are used to build empires and profitable businesses. So, you should apply for Venture Capital if you want to take over the world.

A Product with a Competitive Edge

Most Investors would invest in products with a long-lasting competitive edge. A product solving a real problem is likely to get more investors. When customers can’t do without a particular product, it becomes the USP for the idea. VCs want the business they invest in to generate profits before competition arises. They want a competitive advantage within the market.

Source: CB Insights

Risk Assessment

Every Venture Capital investor takes a risk. It’s their job. Before investing in any business, they want a detailed overview of the threats they will probably face. VCs need to know what the business will accomplish in the future and any eventual exit from the investment. VCs wish to evaluate and minimize risk while yielding great returns. There are mainly four categories of risk: market risks, technical risks, operational risks, and financial risks. These risks could also be regulatory or legal. Furthermore, there is a risk of not having enough money in the fund to meet the opportunity. As an Entrepreneur, you must consider all these risks in advance as VCs will want the answers.

Prepare Documents in Advance

Venture Capitalists will need documents before they close the deal. Two must-have documents are:

  • Executive Summary: After your pitch, you must have an executive summary. It’s a few pages summary of your business when you are not pitching yourself. It covers the essential technical details of your business and elements from the elevator pitch.
  • Business Plan: A business plan comprises all your business details. 6 Significant business plan components include: Table of contents, How will you plan your finances?, Your strategies for growing your business, How will you invest your Venture Capital?, Your financial goals, Percentage of investor’s return.

Long Term Goals

Before the meeting, you must consider the long-term vision of your project. Is your business a solution to a short-term problem? Or you wish to become a billion-dollar entrepreneur. Where do you see your business in the next five or ten years? Will you scale your business abroad? How will you build a competitive advantage in the long run? These are just a few questions that you need to be prepared for. Investors will need these details before they move forward with the deal.

7 Questions that most Venture Capitalists ask

  1. Background and Work Experience of the founders and the team
  2. What is the product? How will it work? Which crucial problem does it solve?
  3. How are you going to calculate the value of venture capital?
  4. Are there any competitors in the market? If there are competitors, how is your product different from them?
  5. What is your business model, and who will you operate? Some popular business models are e-commerce, software as a service, marketplace, franchise, and freemium.
  6. Financial forecast of the company. How will the company perform after 12 to 24 months of investment?
  7. What is the sales strategy? How will the business get leads? Which acquisition channels will you follow?
Source: hbr.org

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