Jukin Media founder and CEO Jonathan Skogmo built his company with the support of venture capital. For many entrepreneurs, venture capital is an excellent way to expand a business and to obtain strategic guidance. However, entrepreneurs may not always understand how to attract the attention of venture capital firms and engage with them in a meaningful way. Securing venture capital involves a great deal of work to build a trustworthy brand and to develop an effective business plan. However, entrepreneurs can do a few things to increase their chances of being funded. The following are some key tips to keep in mind:
Understand what venture capital is.
Sometimes, entrepreneurs attempt to reach out to venture capitalists without understanding the implications of obtaining this type of funding. Entrepreneurs should keep in mind that venture capitalists will want about 10 times their returns in seven years or less, which means that they are not interested in companies planning for linear growth. Rather, venture capitalists are looking for startups focused on exponential growth.
Seek out an introduction, if possible.
Funders receive many emails with potential deals each day. Unfortunately, it is easy for these deals to get lost in a spam box or to be ignored. Many investors turn to their trusted friends and advisors to connect them with deals, so making these types of connections is a great approach. Securing an introduction from a trusted individual does not guarantee funding, but it does make it much more likely that the venture capitalist will fully consider the deal. One of the most powerful individuals that an entrepreneur should become acquainted with is a founder in a particular funder’s existing portfolio. Founders have already earned the trust of the investor, and their recommendations mean a great deal. However, fans of a product or service who know a funder would also be great connections.
Have a reason for needing the money.
Investors will want to know exactly what an entrepreneur plans to do with the money that they receive. Entrepreneurs cannot rely on vague goals such as making new hires in order to convince venture capitalists to invest in them. Instead, entrepreneurs will need to know exactly what hires they will need to make and how much it will cost, as well as what those employees will allow the company to accomplish in the coming year. Funders want to know these tangible goals so that they have a benchmark for judging success. For this reason, entrepreneurs need to be specific, but also realistic when it comes to their growth projections and plans for the future. Venture capitalists not only want to know that entrepreneurs are thinking critically about how they can make the most out of funding, but they also look for those who understand how to set achievable goals.
Create a sense of momentum.
Selling a startup to a venture capitalist is much like telling a story. In order to get someone roped into the narrative, it is important to share something unexpected and exciting. However, entrepreneurs cannot stop there. Once a funder buys into an idea, entrepreneurs should focus on how the company will continue to grow and maintain excitement. Due diligence often takes at least several weeks, so entrepreneurs need to keep the momentum going with news about achievements during that time. Regular email updates with meaningful pieces of news are particularly helpful. For example, announcements about new clients or feature releases should be shared. Also, any press coverage is a great thing to send to a potential funder as it shows third parties are taking an interest in them.
Conduct due diligence about the firm.
Before asking for money from a venture capital firm, it is important to undertake due diligence and to figure out the type of investments that it usually makes. Doing so will help entrepreneurs to tailor their pitches in a way that makes sense for that particular investor while also allowing them to determine which firms it would not make sense to approach. Importantly, entrepreneurs should go beyond statements from the firm about what they invest in and look specifically at the investments they have made in the last few years. These investments can provide a better indication of where their interests lie. Understanding this history demonstrates that entrepreneurs have conducted thorough research.
Take the time to formulate an effective approach.
The initial point of contact with a potential funder is extremely important. Entrepreneurs need to distill several points into a concise and engaging message. As previously mentioned, entrepreneurs need to attract attention with something that interests the investor. However, they need to do much more if they want a response. The initial contact should also include all of the information necessary for a venture capitalist to decide whether or not the deal would be of interest to them. The specific information will depend on the nature of the startup and the interests of the venture capital firm.