As any entrepreneur knows, cash is king. And getting cash in the form of seed money or investment, can be a long and arduous process. Often entrepreneurs can get tired of traveling and pitching to venture capitalists or other investors over and over again. In doing so, the basics of startup investment can be lost. Whether you’ve received funding multiple times, or you’re looking to fund your startup for the first time, the following tips are great to revisit and keep in mind.
- Keep Risk and Company Valuation in Mind
Any careful investor thinks about risk, and VCs are no different. At the same time, high failure rates are nothing new for startups. VCs understand that around 10% of companies will become “meaningful” and only 1-2% will become “unicorns,” while the rest fail. Overall, VCs try to diversify and spread out risk by investing in many companies.
Discussed in 500 Startups’ recent webinar, many investors are looking to emerging markets as a new source of investment. Because businesses have a lower valuation abroad, around say $650,000 compared to around 2.5 million in Silicon Valley, firms can spread their risk while getting a better bang for their buck. Startups should keep risk and company valuation in mind when approaching and searching for VCs.
- Understand the Firm’s Wants and Needs
The best VC firms are specific about who they invest in. Some specifics questions they ask themselves are:
- Why should we invest in a certain company? What makes one better than another?
- How exactly would we like to invest our money?
- When do we want to see returns and hopefully get our money back?
Entrepreneurs must understand their wants and can do so through due diligence and research. The better you understand your audience, the better your message will be delivered and received. Overall, you may have pitched a firm where things didn’t work out. And whether this was due to not understanding the firm’s needs, or just not being a “good fit” for one reason or another, the most important lesson is to always make friends when possible. For example, your startup may not fare well at one firm but their partners could always point you out to another firm they think would be a better fit. As in many industries, connections run deep, so always look to make friends and clearly express your startup’s value.
- Keep Exits Clear
As Dr. Covey says in, 7 Habits of Highly Effective People, start with the end in mind. Tell investors how and when they’ll get their money back. Better yet, show them with clear visuals along with a timeline. The clearer you are about your goals and the way funds will be used and eventually paid back, the better expectations and overall relationship you’ll have with your VCs.
So, whether you’re looking for funding for the first time or are on the path to raising another round, remember to understand how VCs mitigate risk, research the firms you approach and show investors how they can get their money back. Keep these tips in mind when approaching VC firms!
What do you keep in mind when raising money from VCs? Tell us below!
This blog post was inspired by 500 Startups’ webinar: Investment Thesis Fundamentals.