When you’re presenting to a venture capitalist, there are three issues you should be prepared to talk about that are important to every venture capitalist. This information must be part of your discussion with venture capitalists.
1. What’s your exit plan?
The reason venture capitalists invest is to receive a return on their investment. When will your business deliver one? If there’s no return, there will be no investment. The most common types of exit events are acquisitions by other companies and (though less common) initial public offerings (IPOs). These aren’t the only types of exit strategies, but they are preferred by venture capitalists as they offer the highest return on their investment.
Venture capitalists look for business owners who are focused on their business long-term growth. They want to work with people who will put out the effort to grow the company to its full potential. As important as exit strategies are, CEOs should be primarily focused on their day-to-day business. As your business flourishes, exit opportunities will arise. Keep your focus on the present, rather than the future, for the best chances of success.
2. What is your company worth?
Valuation is often disagreed on by entrepreneurs and venture capitalists. Be prepared to have a realistic valuation. An idea-stage startup, for example, is unlikely to be worth $50 million. If you give a truly “fair” projection of your business current and potential value, venture capitalists may use that against you and negotiate it downward. If you undervalue your business, you may not get enough capital, or, worse yet, you may not get any funding at all. After all, no one wants to invest in a business without worth. The best answer to the question is: the market will decide. If your investors believe your business will be successful, venture capitalists may start a bidding war, driving up your company value.
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3. How much funding do you need?
To answer this question, you must have a thorough understanding of your business. You must know how much your supplies cost, how much you will be paying your attorney and accountant, and every other cost. Venture capitalists want to be assured their money is being spent wisely. Know your finances in and out and discuss it confidently. You should be able to specify exactly how the venture capital funding will be used. Sometimes, venture capitalists will ask you what will happen if you don’t get all the funding you’re seeking. What if, for example, you only get 75%? Be prepared to explain what you would do with less funding, and have benchmarks in place. Be certain you understand the timing of potential investments and your company’s potential growth.
All the best,
Peter