Throughout the startup steps, many entrepreneurs need external funding as their savings and retained earnings are not sufficient to cover the investments needed for the venture. A major source of external financing are venture capitalists (VCs). Many venture capitalists aim for very high profitability; a 30 percent to 50 percent annual rate of return. Dissimilar to banks and other lenders, venture capitalists normally take equity positions as well. That means entrepreneurs don’t have to pay hard-to-get cash in the form of interest. Instead, they give a portion of your or other owners’ interest in the company in exchange for the VCs’ backing.
Due to the high risk in emerging ventures, VCs are very picky. And in a free, capitalist society such as ours, there is always more competition over high-quality resources and capabilities than their supplies So it might not surprise you to know that VCs finance only about one or two ventures out of 100 business plans they see. They reject the other 98-99 percent either because they are not in the preferred industries, have not displayed the potential or the proof of potential, have not been referred by the right person, or any one of many reasons.
It is important for entrepreneurs to realize that high-quality and productive VCs are scarce and always on demand as such VCs can majorly influence the success of entrepreneurs in the future.
For many entrepreneurs, it is vital to get the eyes of high-quality VCs because next to providing money, VCs can bring their capabilities to run a growing business and they can find customers for the business thanks to their extended networks. In addition, their brand can, in later stages, provide much-needed legitimacy for the start-up particularly when it plans to go public, according to a 2016 study of Fisher et al.
So it is important to catch VCs attention with your activities and CV. Here are several practical suggestions for that:
- Get a ton of traction in the marketplace. It is important to be active in the marketplace and catch the eyes of your customers. They are more likely to buy your product as much as they are more exposed to your products. If you have some customer-base, investors are more willing to consider your business plan.
- Have meaningful growing revenues: VCs always ask questions about growth you had in the previous periods. Have you watched the Shark Tank Show? There, one of the eessential questions that investors ask is ALWAYS the sales and its growth.
- Have a world-class management team because mangers show the potential of your company. Many VCs invest in people rather than the idea because it is usually difficult to predict the fate of ideas.
- Try to get a personal introduction to one of the VC firm partners from a respected colleague. It is always better to get to know someone through connections as they are more willing to sit with you and spend time on your idea.
In sum, your chances can increase dramatically if you get your plans, clients, human capital in order. VCs are very smart in detecting any issue in the start-up as they have dealt with hundreds (or perhaps thousands) of start-ups in their business. So it is a good idea to be open about your struggles and discuss them as well as your solutions upfront to avoid any negative impression and lack of trust from their side.