How startups attract Venture Capital

Running out of funds is the biggest reason why startups and businesses fail. Needless to say, it is critically important to ensure that enough funds are secured for the current phase of the business. Founders also have to insure that the funds for the next phase of the startup are in the pipeline or in the process of being secured.

Personal funds, loans and grants are common ways to fund new business ventures. However, most of the best performing businesses have had Venture Capital backing at some point. This includes companies like Netflix, Uber, Airbnb etc.

While Venture Capital is not a must for the success of a business, it can be beneficial to structure and plan your startup with Venture Capital in mind.
This has the following range of benefits:

1. You can actively seek and potentially receive venture capital financing which can speed up the progress of your business.
2. You will be prepared to attract investors if you happen to have a chance to talk to potential investors at networking events, business conferences etc.
3. Even if you do not receive or plan to receive investment from external sources, the aspects of your business strategy that Venture Capitalists consider important are often essential for the success of any business.

Therefore, it would be prudent for all founders to know how startups attract venture capital. The following is a brief list of what your business needs to attract venture capital:

A compelling Business Idea

Your business idea must have a clear value proposition based on having identified a large enough problem that affects a large enough group of people (if the problem affects a small niche, the life time value of each customer needs to be significantly high). Your product should solve a specific problem or pain point that your target customers have without introducing an unbearable amount of complexity to the life of said customers.

In addition to your value proposition, the scalability of your idea is also an important consideration. This includes the size of your Core and Total addressable markets as well as the ability of the processes, products or systems in your business to scale up or down when necessary.

A solid Business Plan

A solid business idea is nothing without implementing a well thought out execution plan. The following elements are crucial to include in your business plan. Two important things to note are that thorough Market Research is what guides all of the following aspects and agility and the ability to respond to different factors is more important than having one plan set in stone.
That said, here are some crucial elements of a business plan:

Business Model

It outlines how the company delivers products or services to customers, the value proposition, and the revenue streams.

Revenue Model

Describes how the business makes money, including pricing strategies and income streams.

Growth Model

Explains how the company plans to scale operations, attract customers, and expand market reach. Includes strategies for scaling production, marketing campaigns, partnerships, and entering new markets.

Financial Projections

These include detailed income statements, balance sheets, cash flow forecasts, and profitability projections. They support the viability of the revenue and growth models with data.
The financial plan should include the following information:

• Spending and progress to date
• Burn rate, Runway and FumeDate (These essentially focus on how much money you have, how much you are spending daily and when all the funds will burn out if no extra cash is injected into the business).
• Pro Forma Financial Statements (Essentially refers to income statements and balance sheets showing what your projected finances are for the next 2 to 3 years)

Exit Strategy

Often included in the financial plan to show long-term goals for investors. Outlines how investors or founders will eventually recoup their investments (e.g., acquisition, IPO, or business sale).

A strong team that has an X factor

Having the right set of founders can determine whether a business will succeed or fail. As far as Venture Capitalists are concerned, the following questions are the most important:

1. What unique advantage does the team have that makes it the best team to create and deliver the product or service?
2. Does the team have a logical approach to their launch and growth strategies?
3. Are the founders personally invested in and passionate about the success of the product or service?

Evidence of traction and growth

Depending on the stage of your business, you must show that your product has gained traction substantially based on your revenue which should be showing a clear upward trend. If your business is in the growth phase, it is essential to show how the capital you require will increase your revenue. If you have not yet launched your product, it is beneficial to have positive feedback from your target market based on a prototype they may have tested. This feedback will likely be from the innovators or early adopters which are essentially the first segments of your core market.

The main take away is that it is essential to have a signal that shows that your product is being adopted or will be adopted by the market through hard data.

What’s your next step?

• Prepare a pitch deck and an elevator pitch (a short interesting explanation of your business that you can explain in the 30 seconds to a minute an elevator ride takes).
• Network with Investors and other Entrepreneurs
• Be persistent

Golden Arc Consulting