Avoid the “How Embarrassing!” Moment
No one wants to look dumb — especially while requesting a significant amount of money. As a growing business, it is important to have a firm grasp on the capital raising process — especially if your goal is expansion. The number one concept to understand about Venture Capital is that it is for businesses with established revenue looking to scale up.
Regardless, the tips here of what to avoid will help you plan for the road ahead.
Not Enough Focus on the Financials
A VC firm will make the decision of whether or not to invest in your business primarily based on the numbers. There is an expectation of risk, but the assumptions and projections — as well as past revenue — will need to suggest a healthy return in order to be considered.
[pl_blockquote pull=”right” cite=”From ‘Pitching A VC Why Financials Matter’ by David Hornik”]
“It is almost assuredly the case that an early stage company’s projections are wrong. In the last decade I have only seen one company actually hit the numbers they pitched me on. The rest of the companies have missed by varying degrees of big time. But the real question when listening to a pitch isn’t whether the company will actually hit the numbers they are projecting, but rather what those projections say about the entrepreneur and the business? Is the entrepreneur focusing on the right things? Do the financials make reasonable assumptions? If the assumptions are anywhere close to right, is there a big interesting business to be built? Smart investors will dig into your financials to get a better sense of how you are thinking about your business.”
Insufficient Market Validation
You will be expected to have accumulated some sort of customer base. Merely providing hopeful statistics on the market will not help prove the target’s willingness to adopt the product, or that there is even a viable business in discussion.
Requesting an NDA
Don’t ask an investor to sign a Non-Disclosure Agreement, even if it is just to protect your grandmother’s secret sauce recipe. An investor won’t sign an NDA… ever. And you will look like an idiot for asking.
Unconvincing Exit Strategy
What you’re selling the VC firm is a stake in your company over a given growth period. Their reason for buying in is to receive a large sum once the business has reached its growth goals. In order to be attractive, present a clearly defined exit strategy. Sell them on the opportunity.
Replacing Conventional Introductions with Digital Advances
With what has been said on the importance of the numbers, note that a VC firm is not investing in a product or even the business per se. They are investing in you, the founder. Maintaining a professional level of communication is extremely important. Introductions should first be made in person. If you’re not sure how to go about meeting these people, start networking. Local events and groups are a good way to start. Resourcefulness and the ability to network are traits an investor at any level would be interested to see.
Always remember your audience.