Why should a Venture Capitalist invest in you?

Overview

  • Can you provide a Round A investor with a10 times return on their investment when they exit in 5 years time?
  • Do you have a talented and committed team of superstars?
  • Can you deliver the 30 second pitch, at a moments notice, to a VC (Venture Capitalist)? Can you deliver the 3 minutes pitch to a VC?  Does the 3-minute pitch answer most of the questions a VC would have?
  • Founders often have the misconception that VCs invest in ideas. VCs invest in: market opportunity, innovation and uniqueness, and the team that can make it happen.
  • VC investors evaluate requests for funds much differently than Private Equity Investors.

Can you provide a Round A investor with 10 times return on their investment when they exit in 5 years time?

At what stage of a company’s development  does Round A investing occur?

  • Seed stage: you have an idea and are developing a business plan.
  • Start-up stage: the management team is in place. Proof of concept has been developed.  First customer contacts have happened.  These customer contacts start to validate the assumptions in the business plan.
  • Round A: Sales are beginning and the product/service is being accepted by the market place.  Cash flow is likely negative. Investment goes to quickly grow sales.

Why are Round A investors seeking such a high return?1 Three quarters of VC backed firms do not even return all of the investors capital.  Over 95% do not meet initial projections.  Thus, a very high return is needed for the few companies that do succeed.

 Do you have a talented and committed team of superstars?

  • Have the founders and team done successful start-ups before?
  • What is the integrity and reputation of the founder and team? The VC’s network will provide this feedback.  The founder and team must have both an excellent network and excellent reputation.
  • Does the founder’s team have the necessary superstars? For example, if the company’s success depends upon AI (Artificial Intelligence), is the Chief Technology Officer a recognized AI guru?
  • Does the founder have an intelligent advisory board, with the networks, experience, and skills relevant to successfully growing the business?
  • Does the lead investor have the reputation and network to draw in other smart investors?

 Can you deliver the 30 second pitch, at a moments notice, to a VC?  Can you deliver the 3 minutes pitch to a VC?  Does the 3-minute pitch answer most of the questions a VC would have?2

  • Is the market opportunity large enough to sustain fast and long-term growth, ideally internationally? Can you scale with low or negligible marginal costs?
  • What is your distinct, sustainable, and competitive advantage?
  • Who are the superstars in your team, and is everyone committed to working with VCs as partners? Is the team passionate?
  • What is your clearly defined and realistic business plan?
  • Is there the potential to become a market leader?
  • What is the practically achievable exit strategy?
  • Who are the other VC investors?
  • Is your technology platform unique and proprietary?

Why do you need a three-minute pitch?  Your presentation in your first meeting with an investor should last 3 minutes.  Follow-on meetings will have a longer presentation. Harvard business School research of 200 start-ups who raised $360 million (mostly at the seed and start-up stage, prior to Round A) showed that the average investor spends 3 minutes and 44 seconds looking at your pitch deck. On average, founders needed to contact 58 investors to get 40 meetings in order to raised $1.3 million in 12.5 weeks.3

 Founders often have the misconception that VCs invest in ideas.  VCs invest in: market opportunity, innovation and uniqueness, and the team the can make it happen.

Founders often think that if they have and idea and business plan, all they need is money to start delivering the product or service.  VC are looking for: the market (who are the customers and why will they buy from you rather than the competition), you and your team (Do you have the necessary skills? Can you execute better than the competition? are your good enough?), and the technology (Is it mobile? Is it secure?  Is it scalable? Is it unique and hard to copy?)

Most VCs invest in: Technology based solutions, health sciences, or clean energy.

VC investors evaluate requests for funds much differently than PE (Private Equity) investors.

Round A VC investors, fund companies who have little history, little or no profit, little tangible assets, and may have no revenue.  Even at exit time, there may be no revenue (in the case of Biosciences ventures).

PE invests in companies with a history of revenue and profits, with some tangible assets.  PE seeks to grow that revenue and profits.  PE often looks at their investment in terms of a multiple of EBITDA, and seeks to increase that multiple by exit time.

I’ve observed that PE investors do extremely detailed analysis of the finances and processes of a potential investment.  VC investors do far more analysis of the talent, because the financial and other data does not exist, due to the early stage of the company.

Conclusion

A passionate and skilled founder needs a strong reputation and broad network. The network enables drawing in superstars to the management team and advisory board, as well as a lead investor.

Your next steps

You can download this one-page slide from my website to enable discussion with your investors, advisory board, and management team.

Why should a Venture Capitalist invest in you?

 You can do a self assessment based upon questions above.

  • Ask your angel investors and advisory board for feedback.
  • Ask the people in your network for feedback.
  • Ask a third party to review your talent, your plan, and talk with customers.

Footnotes

1 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

2 BDC, “Partnering with us”, BDC Website, https://www.bdc.ca/en/bdc-capital/venture-capital/about-us/pages/partnering.aspx  this outlines BDC’s election criteria for VC  investments

3 Professor Tom Eisenmann (Harvard Business School), “What we learned from 200 startups who raised $360 million”, http://www.slideshare.net/tseitlin/doc-send-fundraising-research-2015

Further reading

Touko Kontro & Ari Seppänen, “How to get your startup funded?”, NewCo  Helsinki, City of Helsinki, https://newcohelsinki.fi/app/uploads/2018/01/Fundingworkshop-2.2-1

BDC, “Business Plan Template”, BDC Website, https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/pages/business-plan-template.aspx

BDC, “Marketing Plan Template”, BDC Website, https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/pages/marketing-plan-template.aspx