The majority of entrepreneurs we speak to, has one question in common – what to consider when raising venture capital? Venture capital investing is often a selective process: As VCs, we typically select on average 2% to 5% of the ideas we see, and we view a lot of them. Investable businesses normally have the potential for significant sales growth, profit, and shareholder value. A key focus will also be the management team, as they are the ones who will drive and achieve the required growth. This article is outlined to assist entrepreneurs in understanding what to consider when raising venture capital.
What to consider when raising venture capital
Despite the fact that venture capital is a highly subjective business, its perhaps testament to the growth of investible opportunities in South Africa that, according to SAVCA, R1.39 billion was invested in early and growth stage business in 2021. Compare this to the estimated $5 Billion in VC Investment which was raised across Africa in 2022 and the contribution of venture capital to growing businesses and employment across the continent is clear.
Identifying opportunities with the potential to grow involves careful forecasting the future, so be open to the reasons why your idea might be rejected, but also know that a different venture capital firm might have had a different view on the feasibility and growth potential of your business.
As an investment seeker, you need to remember that investment will not happen over night, so don’t wait until the last minute to get venture capital. The process normally takes 3 to 6 months, and VCs don’t like to be rushed, unless they’re in competition! Most entrepreneurs we speak to want to know how long it will take to raise the investment they require and if the process can be sped up. Don’t wait until the last minute or until you think your business is now 100% ready to approach a venture capital firm.
Plan to dedicate time and effort to the process of raising the funds you need. It’s not a push button process, but in the end it will be worthwhile. Make sure you can delegate some of your key responsibilities during the fund raising process as you will need to be available to work with the venue capital firm. During the fundraising phase, you’ll need to be able to grow your business and sell your products.services, so having steam around you who can do this will be important.
In the context of this article it’s important to note that there will be different funding rounds in understanding what to consider when raising Venture Capital. The ideas we share here are transferable across the first few funding rounds.
15 points of what to consider when raising venture capital
1. Get to know your investors: find out if they have any industrial sector preferences or experience, as well as the stage and level of investment they want before approaching them. Check out their website for information on the companies they’ve invested in.
2. Personalize your approach: avoid making your first contact appear like a mass mailing.
3. If you’re new to the game, consider hiring a respected and knowledgeable intermediary–they’ll help you focus your efforts and should be familiar with the preferences and requirements of potential investors – but you’ll have to pay them.
4. Keep your information memos and presentations brief, clear, balanced, and current. Make sure to include information on the company’s history, current position, products, markets, management, strategy, financials, and the deal.
9. VCs prefer facts and data to forecasts, estimates, and hypotheses in an unpredictable world, so do your best to provide them with what they require.
5. Don’t be hesitant to include a SWOT (strengths, weaknesses, opportunities, and threats) analysis in your pitch; VCs will want to see it. Don’t hold back on the flaws and risks — they exist in every firm, and VCs will want you to be aware of them so that you can address them.
6. Always remember that VCs invest in teams, not individuals, so make sure you cover all of the major management activities important to your company, such as general management, marketing, sales, finance, development, manufacturing, fulfilment, and so on. Venture capitalists will be searching for a combination of breadth and depth of experience.
7. If you’re giving a pitch to VCs, be professional and appear as a team: plan ahead of time who will say what and when, and don’t bicker, argue, or fight in front of your investors – yes, it happens!
8.Don’t assume that VCs are familiar with your products, sector, or business; keep it simple and avoid jargon, or at the very least be prepared to explain it. If necessary, don’t be afraid to go back to the beginning.
9. Be direct, open, and honest, and say so if you don’t know the answer to a question.
10.Keep in mind that you’re selling a piece of your firm, so treat VCs as you would any other potential consumer or business partner.
11. Be prepared to answer a lot of questions about your expected sales and direct costs – and I mean a lot of questions: market drivers, products, current and new consumers, pricing, volumes, sales and marketing strategy, competition, and so on – this is the heart of your presentation.
12.Know what you’ll do if you can’t get the funding you need; it’ll help you establish credibility.
13. Keep in mind that VCs are investing other people’s money and are highly regulated – in order to perform their job effectively (and meet their FSA duties), they will need to have a thorough understanding of you and your firm before investing – this takes time, so be patient.
14. Because venture capital is all about buying and selling shares, be prepared to make a promise to sell your company in three to five years, most likely to a trade acquirer.
15. VCs employ a portfolio strategy – some businesses will fail, hence the valuation and rate of return sought on all investments will reflect this – in other words, the successes must outweigh the failures!
This is might not be the full story on what to consider when raising venture capital. Some venture capital firms will have different requirements. Some will be more simple while others more complex. Understanding the above and having the right attitude to being prepared however will be contribute significantly to your ultimate ability to raise the funding you need.
Contact us with any additional questions on what to consider when raising venture capital or more specific questions on raising funding for your business.