Only a fraction of startups ever see Venture Capital money. Why is that, and how can you increase your chances?
According to a 2017 report by Columbia Entrepreneurship, there are between 6,300 and 7,800 currently active tech startups in NYC, making it the second largest startup ecosystem in the world.
However, only 619 of those startups were backed by Venture Capital last September.
If you’re into statistics, one could say that your startup has about an 8.5% probability of ever seeing a dime of seed money.
Therefore, we’d thought it would be a good idea to share some of the best practices of getting that early-stage funding to accelerate your business – so that you maximize your chances.
Without further ado, here are the 5 crucially important practices that will increase your success rate when seeking Venture Capital money:
- Have All the Materials, Including Clean Financials, Ready
Venture Capitalists aren’t just buying your product, they’re investing into your company’s success, which means that their success is bound to yours.
Therefore, they will want to know your startup inside out.
While a phone call might get you a dinner, and a dinner might get you into the meeting room, at some point during the consideration phase the investors are inevitably going to ask you to present your business in written form.
Two of the most essential groups of documents are your business plan/pitch deck, and your financials.
Having a strong business plan presentation is a very well known priority for most founders. However, when it comes to cleaning up your financials and knowing which documents to present, some entrepreneurs find themselves struggling.
Here’s what you need to know about presenting financial statements to potential investors:
- Your cash flow, revenue and expense numbers are a clear indication for Venture Capitalists of how well you truly understand your business strategy. While a smartly constructed pitch deck might make a good first impression, the financial documents are where you prove that you know what you’re getting into.
- Your company’s debt and liabilities are also an extremely important concern for investors, since they determine how risky the investment might be. For Venture Capitalists, some of the biggest red flags include unpaid taxes, previous loans, deferred salaries and unrecorded liabilities.
Investors don’t expect founders to be fully proficient in finance and accounting, but they do expect them to have a strong grasp of their company’s financial health and what it will take to execute their business plan.
- Create a Warm Leads Strategy
One of the reasons why many startups never get to see any seed money and fail is because their founders simply aren’t willing to leverage their soft skills to maximize the success rate of their pitching process.
Think of it this way – would you rather buy a car from a close friend you’ve known your entire life, or a funny looking car salesman you’ve just met?
In Venture Capital, trust is that much more important. Since the stakes are much higher, and the investors are directly tied to the success of your company, establishing strong, healthy relationships based on trust and transparency with your investors is an absolute must if you ever want to land that multi-million dollar series A round.
Instead of dishing out your pitch to all Venture Capitalists you can find on the yellow pages, create a sorted list where you prioritize which investors would synergize best with your vision, business and culture.
Then, do everything you can to establish personal contact. In an ideal scenario, you’ll meet them accidentally, and bond through informal chatter – perhaps at the golf club, or a private poker night. However, if that’s a bridge too far for you, you can take a more direct approach and introduce yourself through a phone call, or by visiting their office.
The key here is establishing as much trust and rapport as possible before pitching your startup.
- Find an Investor Group Niche
Another major mistake that startups make in their fund-seeking approach is they try to pitch to anyone and everyone, prioritizing investors only by their net worth and average position. They take the ‘shotgun’ approach, blasting shells into the darkness, hoping at least one of them would hit the bull’s eye.
However, as we very well know from the numbers, the odds are against you in the VC game, and, eventually, you’re simply going to run out of ammo. Unless you get extremely lucky, you’ll simply waste your company’s time and drain your cash reserves while chasing the golden goose.
Instead, a ‘sniper’ approach is much more suitable to succeed in the VC industry. When choosing investors, consider the following factors:
- Their background. Someone with a similar past to yours will be much more likely to understand your reasoning, trust your knowledge, and invest into your venture.
- Their typical startup. If your startup is creating a physical product, and you see that a particular investor group is only investing in apps, it’s a clear indication they might not be your target audience.
For example, here’s a list of 12 Angel Investor groups currently active in NYC. Check out how different they are – while some focus on Millennial education, others are female-exclusive and support equal rights.
Narrowing down your investor candidates will not only increase your chances, but it will also improve your pitch. Instead of having to ‘standardize’ your company image to suit most any investor, you can now use your unique qualities to impress a particular investor niche.
It will also attract investors that are better suited to help your particular business. Since like attracts like, investors with a similar background or the ones that have a strong presence in your niche will have a lot of valuable advice specific to your company.
- Focus on Growing Your Business, Not Finding Investment
Just like best salesmen never consider their job as selling, but rather as helping or advising, you shouldn’t look at investors as the be-all-end-all solution.
Investment, by definition, is a means to an end, not the end itself.
However, many founders get caught up in the idea that once they get that first round of funding, everything will go right. They will suddenly find themselves standing on the tapis rouge, and their way to ultimate success will be paved.
Investors sense that kind of attitude instantly, and they dread it.
The more you can look and sound like a business owner who’s concerned about the actual business, the higher your chances of getting the funding will be. Focus on key business areas like management, marketing and finance, and leave the investing to the investors.
Instead of obsessing over your pitch, make sure you’re doing fine without the investment – and that if you don’t get the money, you’ll keep doing it no matter what. View investment as acceleration, not transformation.
- Study VC-backed Failures
According to Union Square Ventures co-founder Fred Wilson, only about 1-2 out of 10 Venture Capital-backed companies ever show adequate returns on investment.
Which leads to a natural conclusion that even if you do get the funding, the deck is still stacked against you.
What happens to the other 8-9 companies? Usually, they simply make big management mistakes that cost them unrecoverable losses.
From the notorious case of Amp’d Mobile, who initially raised $350 million but then adopted a loose cash requirement strategy that severely backfired, to Optiva, who raised more than $41 million but were developing their product for so long it became completely out of demand – the history teaches us that many startups simply can’t handle the responsibility that comes with large investment.
Studying these examples won’t just make you a better leader and business owner – it will also make you appear more credible in front of your investors, as you’ll seem like you know what you’re getting into.