Funding

Business Show Talk Part 1: Crack the Code to VCs

May 17, 2018

Does the number £8.3bn mean anything to you?

That’s actually the total of SME investment in the UK over the past year.  

This is clear evidence that investors are willing to support growing businesses and that there is an availability of funds in the UK and overseas.

But here is the burning question…  

How does your business get a chunk of this funding?

Before we get into complex details of the diverse and desired world of Venture Capitalists (VCs), let’s first try to understand why so many businesses are hunting after this source of finance despite it being one of the hardest to obtain.

There’s something about the buzzing term ‘VC.’ This type of funding attracts a lot of startups, who believe that VCs are desperate to invest in every opportunity, and therefore, many people want it. 

However, the truth says otherwise. VCs are very picky. 

The good news is that there are a plethora of other options, which are often more accessible and can be a better fit for entrepreneurs in certain cases. Unfortunately, many businesses are unaware of their other options. That is why we created the Business Funding Show.

To understand whether VC is the option you need to consider, let’s try to understand when businesses should hunt after VC funding.

This game is worth the effort when entrepreneurs are looking for excessive sums of funding, as the entry level tends to be £250K.

Entrepreneurs need to go for VC funding when other sources, such as debt, grants, crowdfunding aren’t an option.

When a business needs an expert management support and strong connections, as this tends to come with VC funding.

When a business needs professional investors who can support with future rounds.

If you found yourself agreeing with the above points, then let’s try to crack the code to VC funding and find out what they are after.

1. VCs aren’t philanthropists who want to donate their money for every single business, nor are they the people who will invest in each pitched idea. 

It’s actually quite opposite. 

VCs are very thoughtful and careful with their investment, as they invest with a clear goal: to multiply their capital, and a minimum of 3 - 5 times! 

Because the return on investment is the first criteria, VCs have a very clear checklist. The ability of your startup to generate revenue is right at the top of that list. 

2. VCs are very selective about who they are doing a business with. 

They want to learn about your team and founders, and not only to find out about the strength of your business in regards to relevant expertise and ability to deliver, but also to know that there will be cooperation and productive dialogue between company’s key decision-makers and VCs’ reps who would join the board of that company. 

A shared vision is crucial. 

3. VCs value people talking business versus talking dreams and assumptions. 

They would much rather prefer someone doing a justified projection of a gradual 20% annual increase in revenue based on current traction and deep market research versus those promising millions in year two with billions in year five purely based on theory, global market potential and because that guy ‘Mark Zuckerberg’ or ‘Larry Page’ did it.

4. VCs like people who are familiar with research and understand who they are dealing with. 

When researching the market potential, you should be clear and realistic about your competition, both direct and indirect. VCs are reluctant to trust the arguments that state, ‘There is nothing like that on a market,’ and they treat these kinds of claims as either a lie or inability to conduct a research.

When researching a particular VC, an applicant is expected to know the firm’s background and requirements, as applying to funds outside of your industry or funding scope might prevent you from passing even the screening stage.  

5. VCs lack a sense of humour when facing laughable valuations. 

When someone had only an idea or even an MVP or prototype, no patents, zero or basic revenue, no impressive tractions and no contracts in place the claim of six- to seven-figure valuations seem to be quite theoretic. Even if the idea is great and investors believe in its potential, they would want to protect their risks and thus would want a bigger part of a business compared to the case of an investment in a business with a strong traction, proven market demand and growing revenue. 

The fairness principle falls also under the same scope. Even if your business could potentially be worth a good few millions in the foreseeable future, but you need to raise 800K now and have only invested 8K yourself, it’s highly unlikely that the investor would accept a proposal of 10% equity.

To sum this up, approaching VCs requires being well-researched and well-prepared. It’s important to not only understand your business but also understand the VC that you want to fundraise from.

If you find that VC funding is the right path for you, check out FundingMatches.com, the only online platform where entrepreneurs can connect with VCs in a few simple steps. To learn more, watch this video here!

Do you have a question? Contact us now!

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