There are two parts to any successful raising of venture capital (VC); one is identifying the best, most appropriate investors for your business, and the second is convincing them to meet you and winning them over with a knock-out pitch.
This article will cover how to find investors for your business, and secure that all important meeting, to set you on the road to delivering the cash injection that will take your business to the next level. If you are a start-up or very small business, consider reading our guide on securing equity crowdfunding, as well as our article on start-up funding rounds, from ‘pre-seed’ to IPO.
Step one: know your target investor
As hinted at above, venture capital funding isn’t for all businesses. Generally speaking, the sort of organisations that go after VC money are well established, with secure sales channels, a strong brand and team all very much in place.
For start-ups, micro businesses, and smaller SMEs, it’s usually better to rely on the generosity of friends and family, a bank loan, crowdfunding or a business angel who’s happy to take a risk on an early stage venture. If VC funding is still your aim, read on.
Step two: survey the market
As with every decision in businesses, it’s important to do your research before you select the group of investors you want to target. This is because VC companies are diverse; each has their own set of interests, be it hi-tech fast growth firms, food and drinks businesses or firms involved in green solutions, for example.
They will also have an investment sweet spot in terms of the average value of their investments, so make sure you don’t approach a company that typically does deals in the £10 million range if you only require £500,000. This is a waste of time, but it might also damage your reputation, painting you as unprofessional.
Before you get into the nitty-gritty, create a long-list of venture capital firms in your sweet spot: those that are comfortable doing deals in your price range and whose market focus chimes with your own, either because they are generalists or because they are interested in businesses in your sector specifically.
Now you can start the filleting process. Take these companies and read up on their history and preferences. What do they say about themselves and, more importantly, how do their portfolio businesses rate them? Check press releases, not just their ‘about us’ pages, and find out what you can from the media about how highly-rated each of your candidate VCs are.
If you have time, try calling a few portfolio firms and arrange 15-minute chats with senior people at as many companies as you can. If you get a lot of negative feedback, then cross that VC off your list and move on.
Lastly, take location into account. Are there offices near you and, perhaps more importantly, have your candidate VCs invested in your geographical territory before? If you’re based in Edinburgh, for example, then ideally you’re looking for a track record of investments in the city or at least close by.
Step three: create a shortlist
Having invested time and effort into surveying the market for venture capital firms in your sector, you should feel more confident about who you want to partner up with, plus you should now be equipped with a lot of valuable information about VC processes and expectations.
Armed with this knowledge, whittle your list down to five or six candidate VCs. As many as 10 is fine, but add too many and the list could become unmanageable, especially if you get a lot of interest from your targets. This short list of venture capital investors should not only be relevant to your line of business, but also have a reputation for best practice and, importantly, seem like the sort of people you can do business with.
An important thing to note is that most VCs will put a member of their staff onto your board. These individuals represent the interests of the investor and will want to know you are spending their money wisely. Remember that venture capital is as much about close working relationships as it is about the financial boost to your business.
Step four: the big approach
They say it’s who you know, not what you know, and this is at least partially true when it comes to securing meetings with VC companies. If you can uncover a mutual friend or connection at one of your target businesses, then clearly this gives you an advantage in, at the very least, securing a meeting with them.
If you don’t enjoy such a privilege, you might want to try and create one artificially, by aggressively adhering to the business events calendar. Do your best to get invited to things, or just buy a ticket, and network until you are blue in the face. Sometimes a chance meeting with someone who knows someone is all it takes to get you in the door.
But if networking isn’t your thing, then you’ll have to resort to the good old-fashioned cold call/email introduction. There’s nothing wrong with this channel – after all VCs are always happy to hear from businesses they could potentially back – but you must approach people the right way to increase your chances of securing a meeting.
Step five: curate your message
If you’re approaching a large number of VCs, then a) be careful not to mix them up in your communications and b) ensure that your templated information is concise, yet rich with descriptive detail. Grab attention straight away and avoid overblown introductions or lengthy passages of irrelevant text. VCs are busy and have little time for anything but the best prospects, so get your ace cards out there straight away.
In your opening email, state who you are, what your business does, how well it’s performing (growth, sales and if you’re feeling confident, margins), your track record of quality and delivery, plus some information about your excellent team.
Be formal, but warm and don’t overwhelm them with data on this first approach; if you pique their interest, they will follow up with a request for more information. Include enough detail to show that you are a genuine prospect and worthy of further investigation.
Don’t talk turkey at this point, there is plenty of time for negotiation, so you needn’t state how much of your business you’re prepared to sell or for how much. Just letting them know that you are in the market for investment should be enough.
Be clear, concise and illustrate the reasons why you were attracted to this particular VC investors. Make sure that every email you send to different investors is unique to them and contains specific information as to why you make a good match. This shows you haven’t just scattered your pitch around the VC community.
Lastly, be patient and don’t follow up too soon. If you hear nothing for a week or two, then a tentative follow up is usually okay. But don’t get cross if a VC doesn’t respond quickly, everyone works at their own pace!
By setting aside time to research, breaking down your audience, looking for helpful contacts and refining your opening pitch, you’ll give yourself the best possible chance of securing a meeting and, with a knock-out presentation, investment too.