CHAPTER EIGHT: Part A – Have you tried to raise capital from Venture capitalists and failed? Do you want to learn the secrets to successfully raising start up capital from VCs?
Are you trying to raise money for business expansion? Are you willing to give VC funding option a trial? If your answer to any of the questions above is yes; then read on as I expose in this chapter, the untold secret to raising venture capital from VCs.
Raising capital is one of the major challenges faced by entrepreneurs; especially when it is a new business. It’s much easier to raise capital as an established entrepreneur than to raise capital as a first time startup entrepreneur. Venture capital funding is another option that you can adopt when trying to raise capital for your new business.
What is Venture Capital?
Venture capital refers to funds provided to high-risk, high potential, startup companies. These funds may be required to start a new business from scratch (seed capital), expand an existing business (expansion capital), or acquire another business with huge profit potential (buyout funding).
Venture capital comes from the input of many investors who are willing to support business ideas that are likely to succeed. The institutions charged with the task of handling the funds and issuing them out to support deserving entrepreneurs are known as Venture Capital Firms or Venture Capitalists (VCs).
In return for their investment in a business, Venture Capitalists hold a certain percentage of shares in the company. Therefore, venture capital is a subset of private equity. Venture capital funds are issued primarily to support businesses that are not yet eligible to take up bank loans or adopt other advanced financing options.
Example of Notable Venture Capital Firms in the United States
- Accel Partners
- Sequoia Capital
- Greylock Partners
- New Enterprise Associates
- Bain Capital Ventures
- Bessemer Venture Partners
- Meritech Capital Partners
- Kleiner Perkins Caufield and Byers
- Advantage Capital Partners
Example of Notable Venture Capital Firms in Nigeria
- Vetiva Capital
- Solid Rock Securities and Investment Limited, Lagos.
- Newdevco Investment and Securities Limited, Lagos.
- Riggs Ventures West Africa Limited, Lagos.
- Best Future Integrate Investment Limited, Lagos.
- Profound Securities Limited, Lagos.
- Osprey Investments Nigeria Limited, Abuja.
- Webar12 Limited, Abuja.
- Disok International Limited, Kaduna.
Of all the avenues available to raise capital; venture capital funding is probably the toughest. Even though existing businesses such as early- and late-stage startups record most successes with this option, some venture capital firms support new businesses with seed capital.
In this chapter, i will be tackling one of the toughest avenue for raising capital; and that avenue is “Venture Capital funding.” Entrepreneurs dread the option of raising capital from Venture capitalists because of the tough process involved.
VCs as they are better known to cut a tough deal. They are seasoned investors that know the intricacies of startup investing and running a business. Not all businesses qualify to pass through the scrutiny of Venture capitalists; and of the few that pass the initial test, only fewer will get the start up funds.
- Now how do you leverage the experience and resources of VCs to successfully start a business?
- How do you raise startup capital from Venture capitalists?
- VCs are tough and get to see hundreds of business plans everyday. So how do you ensure your business plan gets noticed?
- How do you get called up to defend your business plan? How do you stand the fire of Venture capitalists?
Well, you are going to find out.
Before taking your business idea or business plan to a VC; please be sure that your business idea or opportunity has strong profit potential because VCs are purely investors risking their capital for a profit. It’s also advisable that the potential or expected return on investment should be within the range of 35% – 45% per annum; depending on the terms and conditions of the VC.
How to Raise Startup Capital from Venture Capitalists
1. Be in the Right Mindset
If you are not in the right mindset, forget about trying to raise capital from VCs. Why? The reason i say this is because VCs are tough and their rules are stringent. They are professional investors who have kicked the butts of so many entrepreneurs with solid business ideas; so why the heck should they give a damn about your business proposal.
I repeat, VCs are tough. They have no time for story telling and they are very good at airing their views bluntly; which sometimes hurt the emotions of the entrepreneur seeking capital. So before trying to raise capital from VCs; you must be prepared to face rejection and expect some harsh words. You may end up been lambasted by the VCs but don’t take the rejection personal; it’s the norm in the business world.
VCs just want you to feel the harsh reality of the business world; they want you to develop a tough skin because they know that their harsh response to you will be nothing compared to what your potential competitors will do to your business.
2. Are you prepared to give up control?
“I’d rather own 10 percent of a billion dollar company than 100 percent of a million dollar company.” – J. Paul Getty
If your answer to the above question is no; then forget about raising start up capital from Venture capitalist. Venture capitalist cut a tough deal; they are private equity investors, so they are definitely going to take a stake in your business. Venture capitalists usually demand a stake of 25% – 60% depending on the situation at hand or their terms and conditions.
Most entrepreneurs are not comfortable giving up control or opening up the ownership structure of their company. So it’s advisable you ponder over the issue of control carefully before making up your mind on the source of capital to pursue.
3. Build up your Credibility
Now since the odds of raising venture capital for your start up company increases when going the “VC funding” way; how do you increase your chances of getting the capital you need since VCs are tougher with their rules? The answer to that question is “credibility.”
Have you run a business in the past? What experience do you have with respect to raising capital? How do you handle your personal finances? Have you had any transaction or deal with a notable business personality before? Have you built a successful business before?
The above are real questions that VCs throw at startup entrepreneurs seeking venture capital. One of my mentors “Robert Kiyosaki” said that “the more successful you become; the easier it is to raise capital and the easier the process becomes.” I think he said the truth in its entirety.
Venture capitalists want to see a proven track record; they want to see experience and above all; they want to see credibility and competence in the entrepreneur. If you lack these characteristics as an entrepreneur; never knock on the door of VCs.
3. Find a business mentor
“If you want to successfully go up the mountain; ask the person who has gone it to and fro.” – Zen Master
If you want to become good at the game of raising capital from Venture capitalists; then find a business mentor that has successfully done it several times. Or better still, you can seek to be mentored by a VC. Your chosen business coach may be retired or still active in the game but either ways; you will learn tremendously and your wealth of experience will be immeasurable.
“Money always follow management.” – Anonymous
The problem with most startup entrepreneurs that fail to raise capital for their business ideas is that they are trying to raise capital as an individual. Business is a team sport; so also is investing. How can you get the attention of a VC when those competing with you for the startup capital have smart teams on their side?
Having a business team is crucial to successfully raising venture capital from VCs. Who on your team has built a company and taken it public? Who on your team is experienced in business management? Who is on your team? These are questions VCs usually ask entrepreneurs seeking capital.
Let me tell you a secret to getting the fund from Venture capitalists. VCs love name dropping; it gets them excited. They want to know who is also investing in your deal. If you have a competent management team or you secured an angel investment from a reputable investor; it will increase your chance of getting the VC funds.
A business mentor of mine once said that venture capitalists prefer an average product with an excellent business team than an excellent product with an average business team. If you should consider this statement; you will come to acknowledge that it’s the truth in its entirety.
A business team is vital to the process of raising capital for your business; in fact, it increases your chances of securing the capital. Show me an entrepreneur that raised billions of dollars in capital and I will show you an entrepreneur backed by a strong business management team. Just like said in the investment world; money always follow management.
Business plans don’t impress venture capitalists. Yes, business plans don’t get them excited because they come across tons of business ideas and plans everyday. It’s their business; it’s what they do to stay in the game. VCs scrutinize business plans and ideas day in day out so what makes your plan stand out?
The worst mistake you will commit is to approach a Venture capitalist with a pre-made business plan or a business plan written by a consultant. VCs are savvy in the game of startup funding so they can tell if your business plan is worth the onions in less than three minutes. I am not saying that a business plan written by a consultant is useless; all I am saying is that you should be involved with the process of the business planning.
Never take your business plan to a VC unprepared. You should make sure that you know your business idea and plan like the palm of your hand. You should also make sure the budgets and financial issues are comprehensive and your numbers do not contradict each other. Above all; you need to keep your business plan simple and comprehensive using more of tables, graphics and charts.
To further increase your chances of raising capital from VCs, I will suggest you give your business plan to a VC friend or a savvy investor for scrutiny because he or she might pick out some flaws and this will save your neck. I am saying this because VCs are strict with their time and sometimes, it’s difficult to get the attention of a VC twice. You just have one chance to make it or break it and if you misuse such opportunity; you may never get it again.
6. Get Social
One of the best ways of finding a VC is by getting social. Sometimes in the business world; it’s not how much you have or what you know that matters. It’s who you know. Venture capitalists are social networkers. Are you surprised? Well, don’t be.
To schedule or pitch a VC for a chance to sell him/her on your business plan; you have to meet them where they hang out. Now where do VCs hang out? You can catch them at business parties, annual general meetings, entrepreneurial summits and conferences, etc.
Getting social will enable you meet and rub minds with other entrepreneurs who are also seeking startup capital. Getting social might even earn you a referral to a Venture capitalist. You can never tell what’s out there until you move.
7. Have a Good Story to Tell
Do you have a good story backing your business plan and intentions? If your answer is no; then you better reconsider your approach because your proposal and request may be thrown back at you.
Those experienced in the game of raising capital knows that the way you pitch angel investors is different from the way you pitch Venture capitalists. You are trying to achieve a single aim; which is to raise capital but your approach will be different because your sources are different. VCs are more impatient than angels; they are strict with their time so don’t bore them with unnecessary story lines. Keep your message simple; yet detailed.
If the Venture capitalist you are pitching is more interested in the profit potential of the business; focus on that. If the VC is more interested in the management structure or those in the deal; provide them information on that. Above all, focus on what the Venture capitalists want to know; not what you feel they should know.
8. Select your Targets
A good rule of thumb when raising startup capital from VCs is this; “don’t go knocking on every VC’s door with your plan.” It will just be a waste of time and effort. There are a lot of things to put into consideration before selecting potential Venture capitalists to approach.
Some VCs prefer to invest in established businesses while others prefer to invest in young startups. Some Venture capitalists prefer to invest in firms to the tune of $100million and above while others are comfortable investing $100k – $10million. Venture capitalists are also specialized; with respect to their choice industry of investment.
So before approaching a VC, make sure you understand the VC’s areas of interest. Some Venture capitalists focus on investing in technology startups; some in green companies and the rest biotech or industrial companies. It is useless approaching a technology focused VC with a music based business plan because you will never arouse the interest of such VC.
9. Sell Yourself
The next key to successfully raising startup capital from Venture capitalists is your ability to sell yourself. Why should VCs give you their hard earned money? How are they sure the money will be used judiciously? How can you prove your competence? You must have had a business failure in the past, why should they trust you on this one?
This is where selling yourself comes in. This is where you sell your potentials and competence to the Venture capitalists; this is where you prove that you know your onions. If you successfully carry out step one to five and you miss it here; all your effort will be in vain. You will never get the needed capital.
Getting an opportunity to pitch a Venture capitalist is like being given a gun loaded with just a bullet. It’s either you hit or miss and most often; there’s no second chance. So you got to adequately prepare yourself.
Even if it means getting some training or coaching; do it. Warren Buffett once admitted that he took a Dale Carnegie’s public speaking course and that has helped him in his relationship with associates, employees and investors. Sometimes, your personal skills may turn out to be an edge in the process of raising capital, so it’s advisable you develop it.
10. Ask for the Money
If step one to six goes successfully; then you have to take the next action step which is asking for the money. Before asking for the money; you must be definite on your plans, you must know how much you need and the terms involved. Nothing annoys me more than an entrepreneur pitching me with his business plan and when I ask how much in capital he wants to raise; he or she becomes speechless or uncertain.
Before trying to raise startup capital; whether from a venture capitalist or angel investor, you must make sure that you know your aim and objectives. Indecisiveness is one of the silent reasons why most start up entrepreneurs don’t get the venture capital.
So when raising capital from Venture capitalists; it’s advisable you know your business plan like the palm of your hands, be precise with your numbers, sell yourself excellently and ask for the money.
As a final note, these are my ten strategic action step plan to successfully raising seed capital from Venture capitalists. Remember, the key secret to raising startup capital from any source is creativity; thorough understanding of the business fundamentals and a good presentation. Once these three keys are locked in synergy with the ten action steps listed above; you will be able to raise any amount of startup capital you need.
- Continue to Chapter Eight Part B: Angel Investors Vs Venture Capitalists – What’s the Difference
- Go Back to Chapter Seven: Raising Capital from Angel Investors
- Go Back to Introduction and Table of Content