How to prepare a startup for venture capital?
A startup starts with a unique business idea, and that’s the key to the foundation. That foundation would need funding to grow the idea into a business. This is where venture capital for startups comes in the place.
Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that have long-term growth potential.
If you have a startup company, you can get Venture Capital from investment banks and private investors. They are very selective in the startups they invest in since the risk is high. Above-average returns and equity give them the push to invest in startups.
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.
There will be a lot of venture capital funding for startups in 2022. More companies are launching investment funds for new businesses.
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.
Pitching is an ongoing process. New questions arise, so you have to be confident in how you answer them. Most funds ask similar questions; hence you create a FAQ list. It will create an easy solution for both you and your investors. Financial documents like P&L statements, product roadmap, cash flow forecasts, and competitive analysis must be prepared in advance. This shows your investors how to manage their money.
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.
Venture funding in 2021 broke records across the board, Crunchbase data shows, with investment last year up more than 10x what it was a decade earlier. Global venture investment last year totaled $643 billion, compared to $335 billion for 2020 — marking 92% growth year over year.
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.
Competitive advantage means producing a product or service cheaper than its rivals. It allows startups to generate more sales than their competitors. Not only does it make the business more desirable but also unique. It gives the business the advantage of producing higher quality products more efficiently.
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.
Pro tip: Some businesses bring a non-disclosure agreement (NDA) to VC meetings. You must remember that most VCs will refuse to sign an NDA. VCs hear pitches from similar businesses. An NDA creates unduly legal headaches for them.
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.
Your startup idea could be a product, a new technology, an algorithm, or a unique service. Yet you will need an unusual but exceptional way to get those VCs to invest in your business. It is not just the idea or product that you are selling but also yourself. Therefore, give a solid reason to your investors. Having a clear-cut vision of the future increases the chances of the VCs investing in your product.
7 Questions that most Venture Capitalists ask
- Background and Work Experience of the founders and the team
- What is the product? How will it work? Which crucial problem does it solve?
- How are you going to calculate the value of venture capital?
- Are there any competitors in the market? If there are competitors, how is your product different from them?
- 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.
- Financial forecast of the company. How will the company perform after 12 to 24 months of investment?
- What is the sales strategy? How will the business get leads? Which acquisition channels will you follow?
Venture Capital is a crucial step for any startup. It’s an ongoing process that is both time-consuming as well as rewarding. When presenting a comprehensive startup pitch deck, you must cover all the integral elements of your business. Make it quick and efficient so that VCs decide if they wish to invest in your startup or not. Adding a Q&A section will make it easier for you. VCs can go through the most asked questions. Remember, the sooner you get investors, the faster you can focus on your business.
