Founding a startup is an incredibly challenging process for a plethora of different reasons, but one of the biggest difficulties faced by startups, especially in the early stages, is a lack of funding.
Most startups begin as bootstrapped operations meaning that their funds come from personal savings, money made from selling assets and other means that don’t involve outside contributions. However, in order to scale up, it’s often necessary to start looking for external investment, and that’s where venture capital comes in.
Venture capital, otherwise known as VC, is money that startups and more mature businesses alike receive as a financial investment. Venture capitalists, the contributors, put money into companies that they deem promising, especially those that seem to have growth on their horizons and have healthy, exciting futures ahead of them.
Of course, VCs don’t just go around putting money into any and every startup. Their aim is to make money off these young businesses, so their aim is to find the ones they think are going to do well – essentially, it’s about making educated guesses.
So for startups hoping to attract VC investment, it’s all about making the business seem as attractive as possible. Depending on the industry, the location and the specific company, there are plenty of different ways in which startups can do this.
How to Raise Venture Capital
Raising venture capital is a difficult process, and for good reason – it requires convincing people to part ways with large amounts of money, and in order to be able to do that, you’ve got to convince them that your company is worth it.
There’s no single, one-size-fits-all solution to successfully attracting and raising venture capital, but there are a number of things that you can do to increase your chances.
Create a Strong Business Plan
Having a good, strong business plan is a great way to demonstrate not only that you know what you’re doing but that you’re committed to it too.
Your business plan should include an explanation of your business model, market analysis, an outline of milestones, financial projections for the next five to ten years and a solid risk assessment.
Demonstrate Traction
Venture capitalists want to get involved in startups that seem like they’re successful and have proven traction. If you can demonstrate this is to them, you’ll be heading down the right path.
Try and provide evidence of user engagement with your product/service, sales growth, partnerships, ay and all media coverage and share customer testimonials with them.
Create a Strong Team
Investors to say that they invest in people and not ideas, and while that may sound idealistic, it can be true – at least partially.
Create a strong team that has good experience and expertise. Of course, the best thing for investors and any outsiders to see is a happy team and staff who feel as though they’re treated well. If that’s the case, investors are more likely to feel comfortable and happy investing in your company.
Ensure Your Model is Scalable
One of the most important things that investors look out for is whether or not a company has potential for growth. That means that even if your business is currently small, it’ll be super beneficial for you if you can find a way to demonstrate that it’s based on a scalable model. This will allow investors to look into the future and plan ahead.
Make Your Product/Service Unique
Investors are far more likely to go for a business that has a unique business idea, because less competition means that there’s more chance of success.
You can demonstrate the uniqueness, so to speak, of your product/service by showing your competitive advantage, being clear about any intellectual property rights you may have (like patents) and explaining clearly why customers will (and should) choose your business over others.
Identify a Gap in the Market
Identify a gap in the market and make it clear how your business and product/service will be able to meet that need. Provide investors with an explanation of the gap, and evidence of it and explain how you’re planning on filling it.
Establish a Strong Position in the Industry
Some industries are bigger than others, but no matter the size, if you can establish a strong position in it, you should be able to inspire confidence in your company.
Great ways to develop a name for yourself include developing brand authority, forming partnerships and making a concerted effort to gain intelligence on your competitors.
Craft a Solid Business Pitch
Having a good idea, a good business and even a solid business plan are all great ways to help secure VC investment, but you need to be able to convey what you want to do. The way in which you portray yourself is really important, so put enough effort into creating and giving a solid business pitch.
Make sure you explain your company properly, tell your story and be clear about what you want.
Prepare Documentation for Due Diligence
All investors are going to want to do due diligence (as they should), so the best thing you can do is be ready for it. Get all your documentation ready and have it available as soon as it’s requested – this will make their lives easier and it’ll also demonstrate openness and transparency.
A few things to make sure you have ready are detailed financial statements, legal documents and certifications, customer metrics and a detailed breakdown of all the company’s equity holders.
Research the Appropriate VCs
Not all investors and created equal and not all VCs will be the right fit for every business. Make sure you conduct your research on different VCs to figure out who will be the best fit for you and your business. Consider things like geographical location, their stage focus and their preferred industries.
Outline a Clear Path to Profitability
Provide potential investors with a very clear plan for and path to how your company is going to become profitable. It may not necessarily be set in stone but it gives investors an idea of what you’re planning as well as your personal expectations for the business.
Have a Clear Exit Strategy
One of the most, if not the most, important things to look into and be clear with investors about it exit strategies, because it tends to be one of the top things they look out for. This is especially relevant in the case of an IPO, as investors are generally looking to see how they’re going to eventually see a return on their investment.
