17 May Want to Raise Venture Capital (4 Things to Nail First)
Want to raise capital? Are a few questions you need to be able to answer first.
Forbes describes a startup as “… a company designed to scale very quickly. It is this focus on growth unconstrained by geography which differentiates startups from small businesses.” The problem with this unconstrained growth is the capital required to sustain this growth. For this reason, most startups seek outside investment in the form of Angel Investors or Venture Capitalist. While this can be a way of sustaining the company until profitability ensues, raising the capital from these parties can be difficult. Here are a few items you need to be able to answer before walking into that first pitch meeting, though there are many more questions, these will give you that step above the rest.
Investment Thesis
As an entrepreneur, you need to be able to explain the overall logic of the investment and characterize how investors will make money from their initial investment. This is the underlying reason investors will take an active (and equity) interest in your company. You must be able to answer this question clearly and concisely before anyone will write a check of any sort. The end goal is to show potential investors a possible exit, and give them the ability to calculate an exit. A question you may hear from investors could be, “Is this a billion dollar IPO opportunity or is it more likely to be acquired for under $50M? Or something in between?”.
Risk of Failure
The ability to define your weaknesses as a company is a necessity. Though this process can be difficult for many entrepreneurs, this is the one item investors will talk about more than anything else behind closed doors. The risk of failure will be applied to the company itself but also to the team behind the idea and execution. When discovering the risk of failure of a particular venture, it is best to have a third party look at the company and team. This could be a company like Five23, or a greatly trusted party that is willing to be unbiased. From there, the team has a good understanding of the potential risk of failure and can assess these risks to find solutions.
Go-To-Market Plan
This talking point is where you discuss your assessment of the plan to take the product or service to market. It is important to have an idea of how this plan will play out for at least the next two years, however, in most cases, investors will want to see three to five years planned out. Some questions investors may ask regarding a venture’s go-to-market plan may include: “Are the assumptions, including required level of sales spend and timelines reasonable?; Is the sales pipeline adequate, and are key metrics for adoption rate, conversion rates, etc. conservative?; Do customers confirm the need and likely adoption rates?
Deal Terms
Deal terms is where you summarize the relationship between the venture and the investor. Here you cover the term sheet and the expected investor return. Some things you may want to consider with investors is how much they will be involved with the startup. In many cases, an investor will expect a quarterly meeting, however, in some cases, a board seat will be asked for. As a startup, you must be prepared for these requested terms.
Once a startup is able to answer these questions with ease, they are best prepared to raise funding from outside investors. Discovering the best form to tackle these questions should be done well before any conversation takes place. It is best to have a trusted third party help with answering these questions, such as Five23.