In the world today, we continue to see the rise in self-employment and entrepreneurial activities, with more people opting to “be their own bosses.” At the same time, we have seen the growth and development of the venture capital space, both as a funding source for entrepreneurs and startups and as an alternative investment medium for investors.
Note that African startups have reportedly raised between $300 million and $1.2 billion, as put forward by various reports on the basis of available funding information from the said startups.
VC funding is easily regarded as one of the riskiest investment vehicles for investors. As such, an understandably great deal of due diligence would typically be put into any prospect VC investors consider. Despite the growing level of VC participation, evidenced by the numerous funding announcements from startup founders all around the world, many entrepreneurs and startup founders still struggle to secure funding from VCs.
To this end, we have put together a couple of tips to help founders and entrepreneurs, so that the next time you pitch to a panel of VC investors or go through a VC screening process, you can “kill it” and walk away with the cheque.
Have a Viable Business Proposition
The first step to successfully-onboarding a VC investor begins with you. The typical genesis of a VC engagement with any founder originates with a viable business proposition from the entrepreneur. VCs would hardly go further with any discussion if they do not see value in the business. Hence, the business proposition must be one that VCs see as bankable— from the idea to the execution, the marketing, and everything else. Ensure that your business can generate sufficient returns. VCs tend to pay more attention to the following kinds of businesses:
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- Businesses that solve defined problems.
- Businesses with high growth potentials.
- Businesses with large market demands, because such businesses can easily generate attractive returns on their investments (if they invest).
Know Your Business
When an investor backs a company, they are in essence backing the entrepreneur(s) just as much as the business/product. So, it behoves entrepreneurs to present themselves as “back-able” candidates. This implies convincing investors that you are capable of delivering on your claims and the potentials of your business (provided that your business is viable).
Thus, you should be an expert in your business. This goes beyond just understanding the technical aspects of the business, as it also includes having an understanding of the management aspects. Be on top of your company’s figures (both historical financial statement figures, and other important financial information). Understand the workings and intricacies of your industry, consumers, suppliers, government regulations, industry forecasts, etc. Know your business!
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P.S. VCs are very much interested in the characters and identities of entrepreneurs they back; thus, some VCs may include research on the entrepreneurs as part of their due diligence process
Validate Your Product’s Demand
While some VCs may accept proposals from early-stage startups and take meetings with startups that are still in the ideation stage, i.e. still in the stage of crafting the idea or building/designing/fine-tuning the product or service, most VCs are more interested in startups and businesses that have proven the availability of markets for their products.
It’s a plus if the market for the product is large, as opposed to a small/niche market. So, before you approach a VC, it is advisable that you put in enough work into building & understanding your business, and garnering traction, so that you can easily demonstrate the availability of your market.
Know Your Venture Capital
In the finance space, there’s a lot of talk about KYC, i.e. Know Your Client. However, I’m putting a spin on this, to now relate to entrepreneurs— know Your VC. This simply implies that you on your part should carry out some due diligence on the VCs that you approach. Investment objectives and criteria differ from one VC to another. Thus, it behoves you to acquaint yourself with the investment criteria of each VC you approach.
A VC’s investment criteria reveal important information about the VC and its vision: it reveals the VCs’ investment philosophy and the nature of businesses it seeks to invest in. For example, some VCs are sector-specific, i.e. they only invest in businesses within a particular sector or group of sectors. Knowing your VC would help you better prepare your investment pitches, and save you the stress of approaching VCs that are not a suitable fit for your business.
Have a Defined Plan
Another issue of serious concern to VCs is how you intend to run the company going forward. They want to know your plans for the future, if your plans will be able to steer the company on a path of growth, how exactly you intend to spend their money, etc. Thus, you have to articulate clear strategies and action points that would convince them of your management capability, going forward.
Define your plans regarding marketing and how you intend to drive consumer patronage & loyalty, the “use of funds” that would show how exactly you intend to spend their money and define your business operations so that they can understand how the business would run on a daily basis.