For startup, early-stage, and emerging companies, demonstrating high growth potential is critical in order to obtain financing from venture capital firms and funds. But what exactly are venture capitalists (VCs) looking for when they’re looking to invest in an emerging company? How can a company present itself in such a way that makes it attractive to VCs?
Below are four initial questions that VCs consider when evaluating whether they will fund specific deals. If you’re seeking to improve your company’s capital-raising efforts, focusing on these four considerations when crafting your pitch can help make your proposed deal more appealing—and thus more fundable—to potential VC fund investors. Keep in mind that not all companies are ready to approach VC funds to seek capital. You may wish to pursue additional “friends and family” investment or angel investors to help your company reach a stage where VC funds may be interested.
- What makes a deal venture fundable?
- The company should have the ability to grow very large and grow quickly. VC funds typically are looking for investments that they can sell within 3-4 years following their investment. Of course, there are exceptions, and you may wish to explore funds that have a longer time horizon. However, as a rule, you should be able to scale your company’s revenues, users, clients, etc. very quickly.
- Do you have a compelling story? Your company should have a strong underlying reason for its business and a game plan for pursuing its goals. You should solve a major problem that persists in your industry or have a clear break-through in technology or business methods that will make your company a clear winner in its sector and not just an improvement on existing technology or business methods.
- How does the company get the first meeting with the venture fund? What approaches work best?
Traditionally, networking with others in the venture capital industry has been the most effective way to get a first meeting. Even during the COVID-19 era, networking is still important and can be done in many different mediums. It is always optimal to rely on those who know you best and know your industry. Industry experts can introduce you or recommend you to those in the VC fund world. Be creative about cultivating connections to particular VC funds who invest in your industry and particularly those that invest in the stage of financing which you are seeking. Research the partners in these funds and try to track connections that you may have in regard to industry, educational backgrounds, or social contacts.
- Cold calls and emails can still work. Many VC funds will respond to these. You should be brief and focus your pitch so that you grab their attention immediately. As in networking, try to choose VC funds that are investing in your particular industry and in the stage of financing that you are seeking. Most VC funds have associates who screen companies. Try to determine who these associates are and target your approach to them rather than sending a blanket email to all of the fund’s partners.
- Conferences can be great sources of introductions to the VC funds that you wish to approach. There are multitudes of conferences, so target your approach to those that focus on the stage of financing or industry that you are pursuing. Try to participate on the conference panels and take the opportunity to speak about your company and your experiences building the company and/or previous companies. Network aggressively during breaks in the conference and during the pre- and post-meeting sessions that all conferences provide. These early and late sessions are the best opportunities to introduce yourself and your company.
- Incubators may also be a route to pursue. Most incubators provide reasonably good guidance on preparing your pitch to the VC funds. Do not expect too much from incubators’ “demo days,” but they can be good practice sessions and can provide some reasonable exposure to a number of VC funds. Be careful about choosing an incubator and do your research regarding the types of VC funds that usually attend their demo days. Be aware of the fact that the incubators will want a percentage of your equity for taking you into their program–this just goes with the territory.
- What is the most important thing you look for in the management team?
- The experience of your management team will be the first level of inquiry for VC funds. Repeater teams almost always receive a second look from VC funds. Having successfully travelled the VC route and achieved an exit is a major plus. However, many first-time entrepreneurs with great industry experience will also be seriously considered. Having several years of experience in your particular industry and with reputable, successful companies or experts will be a major asset. References from well-known figures in the industry can also be helpful.
- You and your team may have developed particular skills or knowledge in the field that you are pursuing. Make sure to highlight these skills and any awards, grants, or other distinctions that your team has achieved. Emphasize those experiences or accomplishments that distinguish your team from others in the industry. Feature them prominently in your presentations and don’t be too modest.
- VC funds look for leadership skills within the management team, particularly in the CEO. Often the founder is not a leader and needs to add someone to the company who will lead the management team. This is an important step in the development of the company and can be difficult for founders, as many founders who do not possess leadership skills are reluctant to give control of the business to someone else. However, if the founder is not a natural CEO, choosing a strong business leader for the company is critical.
- Advisers and Board members can serve as major assets for your company. You should choose Board members and advisers who are key opinion leaders in your industry and can provide networks with others in the industry, including customers, suppliers, and other key opinion leaders. Do not choose Board members simply because they have a recognized name, such as “Senator Jones.” You may wish to consider Board members who know you well and have contacts within the VC fund community. Assure yourself that they bring more than just their name to the company.
- What do you look for in the written/oral presentation from the company?
- An effective presentation is going to be concise and to the point. Regarding content, what VCs typically look for is something that distinguishes your company from others. Make sure your presentation states how your company provides solutions to a major problem with methods that are new and innovative.
- Detail what market(s) you see your company operating in and how you will remain consistently competitive in those markets. When describing your market, try to be explicit and don’t define the market too broadly. Outline any barriers to entry that you anticipate facing and how your company plans to handle these. Also, explain the barriers to entry for others trying to compete with you.
- Introduce the members of the management team and the subsequent roles each of them will play (refer to #3 above). A complete description of your team and their capabilities are vital to your presentation. The VC fund is investing in you and your people, and they want to know as much about those people as possible.
- And finally, offer projections of where you envision the company being in 6 months, 1 year, 3 years, etc. Be realistic about the amount of capital that you will need to reach your projections, and be clear about the use of funds from your current financing round. As mentioned before, most VC funds are looking for investments they can sell within 3-4 years of investing, so giving a timeline of your company’s expected growth can help convince VC funds that your company is going to fit their time frame. Keep in mind that you will be held to these projections later after the VC funds invest, but do not be too conservative with your projections.
*This article is based on the panel discussion chaired by Barton Partner Charles Hughes as part of the 2020 Venture Summit Virtual Connect, hosted by youngStartup Ventures in August 2020