It can’t be easy, right, to walk into a conference room full of serious professionals and ask them to put in their money on an idea that you got while sitting in a café with your friends. But this difficult task is a huge part of getting your enterprise on its feet.
And if you thought you are risking it all, for a Venture Capitalist it is an equally big gamble, putting money into an idea that may or may not give them the returns they hope.
A VC ‘borrows’ money from LPs (limited partners) for a period of 8-10 years, and invests it in promising start-ups. At the end of the period, the VC has to return the money to the LP, while also continuing to give returns on the investment during the loan period.
Statistics have shown that only about 50% of new businesses make it past their first 2 years. It is a rather big gamble for a VC to take, don’t you think?
Nevertheless, the bullet needs to be bitten, and the faster you overcome your fears, the better it is for your enterprise.
What Does A VC Bring To The Table That You Cannot?
Experience, to start with. The years of having navigated the uncharted waters of business growth and financial decisions makes VCs uniquely capable of helping a fledgling business take wings. This symbiotic relationship is unique, with both parties standing to gain from the combined effort.
However, like in any association, knowing what to expect is the best place to start. This is your checklist for selecting the right venture capitalist for your new business:
What Is The Investment Strategy?
Collaborating with a VC will benefit your company, but what are the investment strategy terms? What will be the VC’s stake in the relationship?
Is The Firm Well-Established?
Remember, you are looking for a partner, an experienced one, to boot. Always choose an established venture capital firm with experience, industry knowledge and the skills.
Are You A Perfect Match?
Does the VC have the experience and know how of your market? The VC needs to share your business philosophy and future goals, and also align well with your management team’s perspectives.
Are You Both Willing To Commit?
The relationship has to last, smoothly, for 8-10 years, and you want to work with people that you want to work with. A business partnership is like a marriage. For it to work, you have to want to make it work.
Now you’ve selected the right Venture Capitalist. Do you think firms are just waiting to invest money in every start-up they meet? No. A VC firm has its own set of criteria when it comes to deciding who to backup. This is what a VC typically looks for:
All VCs are looking for leaders. They want a start-up that is capable of collaborating as a team. Strong business and management skills and experience, or the energy and ideas of recent college students, are what attract VCs towards start-ups. If the team can inspire the confidence of a VC, chances of investments are higher. Remember, VCs bet on people and their abilities.
The Product/ Idea
Will the product or idea create new demand, or does it solve a problem in a better way, or is it simply cheaper than existing competition? Venture capitalists are on the lookout for innovative and niche products that can hit the ground running, and have a competitive advantage. How presentable is your office to arrange a meeting? Is your idea ready to disrupt the market?
Is there a market for your idea? Before a VC loosens its purse strings, it needs to know the cost of capitalising on an opportunity. It needs to know if there is an opportunity.Being able to demonstrate the viability of the project through a pilot study can help swing the decision in your favour.
The Business Model
If all the above boxes have been ticked, the next question is, will the business model work? Is the team prepared for any changes or fluctuations in the market? Have all angles or scenarios been envisaged beforehand? Is there a marketing plan to get new customers? Do they have customers? As a start-up, you need to be able to predict these and many other questions, and have answers ready for them.
Who Is The Investment Competition?
If a start-up has raised money earlier, VCs want to know how the money was spent. Also, how does the earlier investor fit into the market share? Why does the start-up need to raise funds again? How was the figure arrived at?You should know the answers to these and be ready with the numbers at the drop of a hat.
Making Your Pitch
When you are ready with these answers, you are prepared to make your pitch. VCs understand that you couldn’t have possibly managed to get everything correct. However, if you are prepared you will have answers to any questions that come up during your presentation.
Partnering with a VC is critical to your start-up. However, you need to know that you are in the driver’s seat and the VC is your support. Banish these thoughts before you take the plunge.