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The dynamics of approaching a venture capital company to start your businessAsk anyone who has taken the decision to start a new business, and he/she will vouch for the fact that securing funding for the venture is undoubtedly one of the most difficult parts of the process. Getting someone to quite literally buy into your idea is a route fraught with hurdles; but unless you have a handy trust fund lying around, it is a necessary evil.
One of the options that many people overlook when considering who to approach for venture capital is, ironically enough, venture capital firms.
These kinds of companies should actually be at the top of your list, considering that their business is supplying new companies with startup/expansion funding.
Your approach to them, though similar to the banks, is slightly different.
Opportunity spoke with Benjamin Yoskvitz, a former venture capitalist junior risk manager (and current entrepreneur) who has been on both sides of table, about what you need to do to get these firms to buy into your idea.
What is the most important thing to remember when approaching a venture capital (VC) firm?
This is a rather all-encompassing suggestion and idea, but it is one of those things that is difficult for first-time entrepreneurs to do – but go in with your eyes open.
When you first start raising money for a business, you may be clueless about what the process entails. There is no excuse for not knowing, and there is an expectation from VCs that you know what you
are doing.
Read everything you can. And ideally, find a mentor – someone with experience with raising capital.
How important is the initial pitch?
A great pitch does not automatically close a deal. But it is the critical first impression that you make, and you can never change that afterward.
People often say, “Raising capital is like dating”, and no one doubts the importance of first impressions in dating. The pitch is what a venture capitalist uses to size you up. Most often, it is the chief executive officer or managing director giving the pitch, and the VCs are looking for personality, confidence, passion, knowledge, intelligence and more.
They are gauging – without really listening to every detail of what you are saying – whether or not they think you can lead your startup to success.
I can guarantee that if you bomb a pitch, it is almost impossible to raise money.
What kind of things should you prepare for when making your pitch?
Be prepared to jump around. I have rarely been in a meeting with VCs where an entire presentation went by without questions being asked. Often, you may be bombarded with questions, which means jumping around. So knowing your pitch well is important to ensure that you are not thrown off.
If you have to look for a slide to answer a question, you are not properly prepared.
It is important to practise the pitch as if you were going to give it on stage, but ensure you can also handle the flurry of questions and interruptions.
Here is a helpful tip that people with public relations training use, called ATM – Answer-Transfer-Message. The idea is that you Answer a question by very quickly Transferring the answer to the Message you are trying to give.
For example, if a VC asks, “Why don’t you do X or Y?” You respond with something to the effect of, “Those are interesting ideas, but our core focus at the moment is to get Z done in the next six months. That will help us achieve a key milestone…”
You will be forced to jump around in your pitch, but work to keep the meeting on track with the message you want to deliver.
Is that the only homework you should do?
Meeting a VC has much in common with a job interview. Do not meet a venture capitalist without knowing who he/she is and more about the firm for which he/she works.
You want to know the firm’s past investment history. You want to know the history of the individuals you are meeting. And you want to know if they have invested in anything that is relevant to what you do.
If there is any relevance, you want to express that during the meeting; it adds context and shows that you are committed to working with them.
It has been said in business that it is not what you know, but who you know. Does that apply in getting venture capital?
Absolutely. It is possible to get the attention of a VC and get a positive response, but generally it works best through an introduction. And not simply any introduction; you want an introduction from someone the VC knows and trusts. The better the introduction, the more likely you will get a response from the VC.
So network. A lot.
Do not hide in your cave. And do not focus only on introductions; once you have met a VC, you want evangelists who can support you and back-channel communicate with the VC.
What are some of the mistakes people make when approaching VCs?
Do not be a know-it-all. No one likes know-it-alls. No one likes braggarts. Do not try and act smarter than everyone else in the room. You may be, but it does not matter.
You do want to show VCs that you are very well prepared, know your material inside out, and so on. You want to be confident and prove that you have planned things out – but do not be a know-it-all.
Any other advice that people should know?
Two things. Firstly – and this is really advice on how to run a business overall, but it is also something you will want to focus on during meetings with VCs – get as far as you can on as little as possible.
VCs want to see how far you have come while bootstrapping or on seed capital, if you have raised any. The further you have come, the better impression you will make on them.
Secondly, have an idea what your next step will be if your startup becomes successful. Will you try to expand, or set up your company for acquisition? For VCs, that second option is very important because often that is how they make their money back. So they want to know who will buy you.
And for how much? You should have comparable examples within your industry, as well as from other industries.
You should have some target acquirers that you think are good fits, with an explanation for why you think they are good fits. And you may even get into a conversation on how you will get on the radars of those acquirers going forward.
Zaid Kriel
A great pitch does not automatically close a deal. But it is the critical first impression that you make, and you can never change that afterward
Six points to keep in mind when looking for venture capital
• It takes time – typically around six months, perhaps longer now, given the economic downturn.
• Know the process. You have to understand the capital-raising process – from first meeting to the very end. Not having done it before is not an excuse. www.learnvc.com and www.venturehacks.com are good online recourses to look in too.
• Valuations are dropping. So if it is your first round of financing, do not expect VCs to value your company very highly. You will give up more for less – it is the reality of things.
• The odds are very low to begin with. VCs invest in less than 1% of everything they look at. So your odds are even lower than that, and many venture firms are holding onto cash or reserving more for their existing portfolio.
• Anticipate the tough questions and have good answers for them. Some of the typical questions include, “Is this really a R100-million business?” And, “Do you really think the market is big enough?”
• Defensibility and intellectual property still matter. Most startups are execution-based – it is about getting out there faster and executing more effectively than competition. Many execution-based businesses get funding. But venture capitalists will still ask about defensibility and intellectual property. Ensure you have an answer to another tough question: “Can’t a few guys just build this in a couple months and compete?”
