A mentor’s guide to acquiring VC funding for startups
Most venture capitalists are looking to invest in start-ups that are industry-disrupting, which means that it has the potential to scale by addressing a market gap. Examples of an industry disruption company include Airbnb in the hospitality industry or Uber in the transportation industry or Netflix in the entertainment industry. Other than the growth potential, below are some of the most critical elements observed by VC’s while deciding whether to invest in a start-up or not:
Which specific problem in the market is your technology/product/service addressing?
What is the market size or demand for such a technology or product?
How your idea different from the existing ones?
What is the scalability of the business model?
And finally, have the team thought of an Exit Strategy?
While most of the start-ups do look for funding at some stage, more often than not they miss out on the opportunity because they fail to consider several elements in their early stages, such as:
Documenting the founders time spent and amount spent
Founders profile and Board of Advisors
Intellectual Property Rights - whether they should own or have a license for the product/service
Maintenance of Financial, Technical and Commercial contracts data
Detailed Business Plan outlining the scope of their start-up and how it’s going to expand with appropriate investments at the right time – condensed into a well-presented Investor Deck.
Based on the above requirements, it is critical for an entrepreneur to have a team and data well in place and properly documented.
Many investors also consider a team behind a start-up as an important element, much more than an idea or product. They look for a team that has the right skill sets, experience, temperament along with the passion and drive to grow the business. An entrepreneur should ideally have the following onboard and anticipate questions about his team members:
A well-versed business consultant to help the company analyse organizational practices, identify weaknesses and recommend solutions
An established legal consultant to provide assistance in all legal matters and advise on legal documentation, negotiations, contracts
A financial advisor to provide the required financial planning and support to achieve the financial goals
Marketing advisor or consultant to define marketing strategies, identifying the most appropriate message, and executing these strategies for businesses
These are considered as critical pillars of any business for actual implementation and also for the purpose of valuations.
And before you start elbowing your way into a meeting with these venture capitalists, make sure you have all the data to back-up the nitty-gritty elements of your pitch including background on your VC. VCs often have different interests. It is recommended to pitch your idea to the one who has vested interest in your business sector. And the golden rule is to never approach any investor with a half-baked storyline.
From personal experience, I have witnessed promoters approach investors with just the details of the product they develop, but from an investors perspective, though the idea may be really good and appealing unless it is substantiated with adequate figures on how that product is going to convert in numbers and commercial value, it may not really interest or engage them to move to the next level of conversation. While the process is time-consuming, it is important for founders to start early on in their journey to work on every element of their model before they meet investors.
Lastly, like everything else about the fundraising process, there are different ways in which investments can be made. The most common of them are:
Direct equity based on valuations
Preferential rights-based equity
Each method has its advantages and disadvantages which you can discuss in detail once the VC has expressed their intent to fund either by way of Letter of Intent or a Term Sheet which will contain various terms and conditions on which they will consider funding the start-up.