An injection of venture capital can certainly accelerate the growth of your business., but raising money from outsiders, whether they’re angel investors or venture capital firms, is probably going to take longer than you think. That translates into precious time away from your team and your customers.
During my time working with entrepreneurs seeking venture capital for a consumer product company, I’ve found that there are certain actions you can take to make the fundraising process more efficient. Whether you’re actively fundraising or just curious about how you should engage with the venture capital community, here are three considerations to keep in mind.
You should be building a venture business.
Want to understand why VCs behave the way they do? Take a look at venture math. Most VCs are investing other people’s money. This means that their investments must generate acceptable financial returns, which, ideally, require tripling investor money within five to seven years.
It turns out that this is exceedingly difficult. When you look closely at a VC’s performance, you see that it is often one investment out of an entire portfolio of a dozen or so startup investments that delivers the entire financial return of the fund. Venture capital returns are said to follow a power law, and this is why VCs will drill down on your business model, your total addressable market, and the likelihood that you and your team will have what it takes to build a substantial business over the long-term. And it’s why VCs have a swing-for-the-fences mindset when they hunt for investments.
Ask yourself whether you’re building a business that is going to deliver a venture return. Are you addressing a huge, preferably billion-dollar, market? How much of that market can your team reasonably capture? How and when will your investors get their money back? If you can’t arrive at satisfactory answers to these questions, consider small business loans, factoring, friends or family money, allocating, and other sources of capital that are easier to access than venture capital.
Every interaction with an investor is a chance to tell your brand story.
I met with a founder once who had started her company after a very successful career as a management consultant. She was building a stylish apparel business, and her deck was the most thorough I had ever seen. It covered every last detail and anticipated all the key questions. There was one problem. Full of monotone graphs and boring tables, it was obvious that the deck had, indeed, been designed by a management consultant.
Whether it’s a deck, a web site, a lookbook, or any other collateral you’re sending to investors, don’t miss the opportunity to tell your company’s brand story. At the very least, make sure these materials are beautifully designed, and that they use high quality assets. Investors should quickly grasp your customer’s attributes and why customers choose your product over the competition’s. Your brand’s positioning should shine through.
Remember, your pitch materials are an extension of your company and your capabilities as a founder. If they look ugly, consumer products investors will tune out. This sounds like common sense, but you’d be surprised how many founders get it wrong.
Make sure you have a plan for making and distributing your product profitably.
My colleague Carter says that the secret to building a successful business is to buy for 1 and sell for 3. Again, “buy low and sell high” is common sense advice, but it is much harder to put into practice than it sounds.
Early-stage investors, including those who invest in consumer brands, will typically invest long before a company achieves profitability. However, they will rarely back a founder who does not pay close attention to the bottom line. At the very least, this means accounting for all landed costs in your financial projections, calculating the unit economics of your business, and understanding how your margins will evolve as your business scales.
All of this matters because profit buys a young company freedom — the freedom to make mistakes without paying the ultimate price — running out of cash.
This isn’t a comprehensive list of fundraising tips. Instead, consider it basic fundraising hygiene that will remove some of the friction that can break down founder-investor interactions. If you keep all of the above in mind, you’ll increase the odds that investors will engage with your story. And that just might make the difference between closing a round of venture capital or not.
Interested in more fundraising advice?
Check out our 6 ‘Non-Traditional Ways to Fund Your Business for more fundraising tips, and Need $15K for Your Brand? Try These 11 Tips for a comprehensive guide to improving your crowdfunding campaign and generating an income from it.