Entrepreneurs that seek funding support from venture capitalists don’t always fully understand how the venture capital investment process actually works or what they want to see. The process can be slow and will require lots of time and trust.
Taking on a VC investment is like taking on a business partner, a partner who will want an active say in how things are decided and ran within the business. Before they invest in your business, the VC will run a due diligence assessment on you, your business and ask you some questions. You will need to be ready and answer the questions naturally and confidently, to ensure the VC takes you seriously.
Although you need to showcase your passion and commitment when sharing your vision and the opportunity, this is not a time for over selling the company. This is a potential partner you’re talking to. The best approach is to be truthful and authentic.
Here are the six things VCs will want to know before they invest in your company:
- Establish that there’s a competitive market for what you’re selling
Venture Capitalists will want to know about the market for the product or service you’re selling. More than that, they will want to know that it’s a big market. Why? VCs are in it to help you grow, and big markets support growth.
If the market you work in is too small, there may not be room for enough growth for the investor to get a return on his or her investment.
Don’t be scared to disclose competition – competition demonstrates market need. You need to show you understand the competitive landscape.
- Show them how your product is unique and different from others
A unique product or service will be attractive. A product or service that is not somehow different – that becomes a commodity – will not be easy to fund. ‘Unique’ means not only different and new, but also hard for a competitor to replicate. Your product or service needs to include a specialist and personal finish that will prevent a competitor from overtaking your company. There are several ways to stand out from the crowd:
- Product differentiation: You’ve got something completely different and tough to replicate.
- Process differentiation: You are selling a new, more efficient way of doing things.
- Price point differentiation: You have found a way to sell a product or service for less or for more i.e. premium pricing.
- Niche differentiation: You’ve found a market that’s a particularly good fit for your company’s product and/or service offering.
Differentiators change over time. In the past, for example, holding a patent was a good differentiator. But today patents are less effective because technology moves so quickly and it is often quite easy to get around them. The important thing is to have and to keep developing strong differentiators.
- Proof that you have a solid management team in place
Having a management team with experience and commitment is crucial. Don’t try to hide a weakness – address it directly and explain how you will rectify it. The VC will ask for details about everyone on the management team, and will want to meet the players. Previous business success is a big plus but a previous business failure is not necessarily a blocker, failure to disclose will be.
- How your company is a good fit for their investment
Every venture capitalist has a philosophy that underlies their approach to investing. Venture Capitalists are strictly in this game for the return and will take a strategic approach.
A VC who specialises in a certain area – for example fintech – will come to know that area very well, and be able to understand the playing field, competitors, trends and buying behaviours. They may also want to invest in companies that have synergies with each other.
- Back up whatever you tell them with metrics and solid evidence
A VC who is interested in you will take the time to get to know you before investing. If you chat about your projections for growth, you can bet that the VC will be taking notes. If your short-term growth falls short of budget, they will ask why.
So be aware that you will need to back up everything you tell VCs with metrics and solid data. For your own firm, that means having solid evidence of projections and progress as well as being able to support claims made.
- Explain how you’re going to use their investment
A VC investor needs to know – in some detail – how you intend to use their money. Will you invest in advertising? Will you hire new talent, either a top-tier director or new sales staff? Will you use the funds to outsource something you need so you don’t have to develop it in-house? The investor needs to know what you plan to do with the money, and how your plans connect with your strategic growth goals.