Investing for the sake of the adventure is rarely a good idea. Venture capitalists are masters of investment and run the game on what makes a sound business decision and what looks too risky. They’ve built careers off of detailing the key factors necessary to make these decisions, regularly. Ernst & Young U.S. Venture Capital Leader Jeff Grabow shared his wisdom with me recently on a podcast I ran, where I learned all about what venture capital really is and why VCs invest.
Every business owner knows the value of capital. Capital is the lifeblood of a company. When you have it, you’re thriving. When you don’t, you’re in trouble. The question of where to get capital can be tricky and is based on what your company is looking for.
You’ve considered private equity, but you’re not looking for that kind of partner. You want to find one who fits the mandates and vision of your company, who understands the risks and rewards available to an early investor but who isn’t interested in generating new ideas or taking over. Enter the venture capitalist -- the individual who can save a company from failure or spur a new period of growth.
The first thing you need to do if you’re looking to land a venture capitalist is to ensure you know your business inside and out. While this isn’t a business sale, this process can be eerily similar. You need to understand your market, risks, financials and projected growth. You’re marketing your business to a VC firm as almost an acquisition target. After all, your investor needs to see the value of your business for the long term so they will give you the capital you need.
Being transparent during this process is vital. Knowing your competitors matters so you can efficiently target and respond to any concerns your VC may have in terms of potential market challenges. Chances are, if your competitors are looking to expand, they may be targeting the same VCs you are! Demonstrate the unique benefits of investing in your company compared to one of your competitor’s to win the investor over.
Having answers to common questions like who your customers are, what markets you are exploring, what your expenses are, what type of revenue streams you have, where you want to see your business in five years, etc., will strengthen your portfolio’s appeal.
One of the other main points to consider in a sale and when looking for investors is the fit. Does the VC you’re considering know the type of company you run? Is the firm familiar with your market? Do your goals match up? Has the VC invested in a similar company in the past? Did this company see growth after the investment? And on the personal side of things … do you trust your potential partner?
This means you need to be transparent about your current operations, your expectations from the deal and what your vision for the future of your company looks like. If you have an identifiable weakness, your VC can help you overcome it (if necessary). It is much worse if a problem you’re already aware of comes to light during talks with your investor: Your credibility will go downhill and it could even tank the job. Of course, this goes both ways. You’ll want to ensure the investor has a good reputation, as well.
With a capital infusion comes a commitment. In this case, it’s usually a 10-year commitment. Are you prepared?
I learned that getting a VC is a partnership as close as any you could have chosen, though it’s perhaps a little less traditional. Both of you have a vested interest in the success of your enterprise, though one is the financial backing and the other is running the show. You each needed something from the other (money and a new product or service to back) and saw value in this coupling.
That being said, the one thing you both have in common is the finite resource we all have access to -- time. You only have 168 hours each week with which to achieve all your goals — personal, professional or other — not to mention doing the basic things necessary to live. This is why vetting each other is an absolute must.
No matter what your industry is or whether you provide products or services, you are likely going to need a lot more funding than you anticipated. Increasing your business will cost you -- and likely more than you planned for. If you come at this with the expectation that (despite your diligent planning) you are going to need more money than you thought, you will save yourself a lot of stress and have a more successful outcome.
How many startups do you know still have their original owner or CEO? Not many. Most entrepreneurs have started other projects or ideas -- others chose to continue on in a creative capacity. Entrepreneurs tend to like to build a business rather than sustain it. If you think of why you started your company in the first place and where you grew it to, are you satisfied with what you’ve done? Do you think you’re the best person to continue trying to grow your company?
If you can honestly say you’re not done, then maybe you just need a capital infusion to push your business to the next level. If you are done, then perhaps it’s time to sell. Ask yourself the appropriate questions and put in the due diligence suggested above to figure out if an investor is your next step.
This article was first published by Ryan Tansom on Forbes