Let’s face it: if your business is growing fast, you’re likely to need capital. There are different ways of financing it (advanced or discounted sales, strategic partnerships, bartering, grants & loans, crowdfunding) with Venture Capital one that arguably poses the greatest risk for both founders and investors.
Because when it comes to building a relationship with a VC, in most cases you’re living on two different planets. As a Founder you’re driven by your passion to create something new and innovative, while they’re driven by return on investment; not just any returns, they demand huge returns (there are several reasons why, but to summarise only a couple of investments make the fund, so they need to outstanding to payback for all the losses and still return 300% or more to the investors that backed the VC fund manager).
You don’t deserve venture capital, you make yourself backable.
Last year (2019) London alone saw 221,000 new startups being formed - that’s a lot of companies seeking investment. So when it comes to funding, you’d better be prepared, because it’s competitive out there, and you only get one shot. Here are some of the basics you must have in place if you stand a chance. I’ve played both sides of the fence - as an entrepreneur with numerous businesses both small and large under my belt and, more recently, helping startups to raise funds from Angel stage to Seed and Series A via my Fundraising Bootcamp.
1. Great execution team. See any VC website and the same message appears: VCs are looking for robust, well-rounded teams with complementary talents. Solo founders are a hard sell (nobody knows everything, single person risk, a mix of skills, background and experience is critical). At the early stage, you have no real assets but your team and company culture. A great team proves you can attract talent and have something big enough that great people want to join you.
2. Great product-market fit - the world is full of amazing tech nobody uses. Build something that people actually want, demonstrate you’re solving a real and growing problem, that people use your product and want to pay for it (or for premium features). VCs (especially in the EU/UK) love businesses that are already making money. Ultimately, VCs back fast-growth. The rest is PR. So talk to customers, get them a deal but get them to show you the money as early as you can.
3. Huge market - Do the numbers stack up? Is the market big enough and growing? VCs are looking for 10x returns -anything less and you’re a lifestyle business, which is great for you the founder, but useless for a VC.
4. Strong Margins & Economics - The numbers are realistic, make sense and show the potential to be a unicorn. Remember, put simply a unicorn is a $billion value business, or roughly $50m-$100m revenue per year, or $4m-$8m a month. Hard to get there, but not impossible.
5. Strong tech Lead - VCs like in-house talent, especially from the outset. A good CTO with a strong, aligned vision is always going to be a more attractive proposition to VCs than a business without a technical co-founder. Outsourcing tech is a much harder sell.
6. Good market timing - the godfather of tech Bill Gross analysed the single biggest variable behind the success (or failure) of his 200+ companies, and in short, it is market timing (TED talk here). It really is all about luck, in the end, if the market’s not ready for you, your business won’t scale. So focus on huge demand shifts (think streaming media, subscription economy, gig economy etc).
7. Tons of data - forget the “passion and drive” VCs write about poetically; before getting a check you’re going to have to show a ton of data points. And I don’t mean vanity metrics or pretty graphs from App stores or Google Analytics. Conversion funnel metrics, time to closed deal, LTVs, revenue per X (head/time/campaign/followers). Why? VCs love data and want to know you’re tracking what matters too.
8. Be ready before you out. I’ve raised over $200m, from tiny early-stage rounds to multi-million rounds. Broadly speaking, the majority of failed deals are when companies go out pitching when they’re just not ready. Get all your documents lined up, all financials up to date, and the basic investor pack with a teaser, 10 slider, easy to use financial model (XLS, so they change assumptions and run scenarios) and full-size IM (for the Analyst to compile their internal investment case doc). You only get one shot, so you’d better be ready.
Short bio: Francois Mazoudier helped build 8 tech companies over 20 years, from startup-to-IPO, turnarounds and bankruptcies - he knows the highs and lows of building tech businesses. He runs Tech Leaders Capital, a co-investment club for global Tech CEOs with outstanding careers and track records and TMRW. south London’s no1 workspace for fast scaling Businesses that he helps with funding, staffing and Growth.