The art of securing venture capital
Ask an audience of new business owners to identify the most crucial driver of growth and you are likely to receive an array of responses. The list might include talent, determination, vision, strong leadership, competitive advantage and product differentiation. In the final reckoning, though, one answer should clearly feature above all others: money.
The truth, after all, is that every company starts out small and needs funding to become bigger. Some entrepreneurs might use their own finances to fuel expansion; some might secure backing from their family or friends; and some might be left with no choice but to throw themselves on the mercy of external lenders.
The entrepreneurs who make up the last of these groups have almost invariably faced the toughest challenge. Historically, their businesses have lived or died by the caprices of financial institutions. With banks staging a significant retreat from lending in the wake of the global financial crisis, the situation today is even more complicated.
This is where venture capital enters the picture. So how might a small, ambitious and potentially growing business win the hearts – and wallets – of venture capitalists (VCs)? I stress the following points when coaching and supporting entrepreneurs seeking funds.
Recognise what unites entrepreneurs and VCs
As an entrepreneur, you have to persuade a VC that your business is worthy of investment. In turn, a VC has to do much the same thing when engaging with high-net-worth individuals, pension funds, investment funds and other sources of financial backing.
This means that for entrepreneurs and VCs alike it’s very much a question of track record, reputation and the attractiveness of a prospective deal. So, if you can add something to a VC’s own story – in other words, if your company can make a VC look good – you should have a basis for a solid relationship from which all parties are likely to benefit.
Understand what drives a VC
It is important to consider the context in which an individual VC investment manager is operating. Some VCs have long since made their reputation and have gone on to work for other reasons, while some are still on the way up and looking to build a career.
You should ask questions from the outset so that you can appreciate which of these camps a VC falls into, because this will help you better understand the motivations at play. This is often vital to successfully appealing to a VC and building a good relationship.
Don’t set the alarm bells ringing
At least in my experience, the first thing that’s particularly likely to alarm a VC is to intimate that a business’s managers have a short-term view. The second is to hint that funding will be used to bankroll huge salary increases or a glamorous relocation scheme. The third is to suggest that cash is all that matters.
So, here’s what not to say: “Basically, we want to get rich quick and get out. We want to pay ourselves a fortune and move to New York. Okay? Right. Show us the money and leave us to it.”
Demonstrate learning and flexibility
VCs understand that where your business eventually ends up may be very different to where you initially intended. You, too, need to show that you’re ready to learn and evolve as your company’s trajectory unfolds.
A credible business plan will go a long way towards achieving this aim. It should serve as a badge of recognition. If you can back it up under cross-examination, demonstrating that you possess the skills to adapt to developments and absorb their lessons, you’ll have ticked an essential box.
Be in the right place at the right time
Swimming against the tide can rob you of lots of time and effort. The greatest idea in the world is all but useless if you don’t see how it might fit into the bigger picture, which is why you should give thought to what might be the best funding route for you.
Examine the trends that are shaping the investment landscape and see whether you can attach yourself to one of these. If the moment isn’t quite right then it might be wise to wait a little while. Don’t plunge into a market that’s manifestly unsuitable.
Be a winner
According to various studies, successful venture capital investments tend to involve companies whose management includes someone with experience of the relevant sector or which have a mentor/non-executive director who has “done it before”. Just as crucially, they also tend to be in high-growth markets.
This is because very few people make money in a small and declining market. Remember that a market in which everyone in effect collaborates to grow an opportunity – as opposed to a market in which everyone fights to take customers from each other – is a market that’s likely to produce more winners.
David Falzani MBE is a Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship and president of the Sainsbury Management Fellowship.