Remember the fairy tale about clapping your hands as fast as you can to bring a fairy back to life? That certainly won’t bring you the venture capital that you are looking for. When you decide the time is right to be working with venture capital companies, the most important thing you need to do first is to educate yourself and your team on the critical criteria they use to review your company to lock down funding. When passion and vision aren’t enough, what other essential components can help you look forward and make your business dreams a reality?
I quickly discovered that the banks (at least the dozen or so I talked to) were mostly interested in looking backward. What were the past three years’ financials and tax returns? They were not interested in the experience of the management team, future growth prospects or the potential profitability of the business with appropriate scale.
In contrast, the VC groups I talked to were almost exclusively focused on looking forward: What did our rapid growth indicate about the size of the business opportunity, the nature of the market we were serving, how were we differentiating our offer and business model, what barriers had we created to potential competitors, the nature of our IP, and the experience of our management team?
Long story short: We eventually secured VC funding and used the money to continue ramping the business. We emerged as leaders in our niche space and sold the company to VC investors.
Clearly, VC funding isn’t going to be practical, possible or desirable for every kind of business. (Selling equity is a very expensive way of raising capital compared with paying interest.) But for new, not-yet-profitable businesses with bright prospects, the willingness of angel investors and VCs to look forward rather than backward could make
them a viable option.
Now it is your turn to look forward. Is your start-up differentiating your business model? What barriers have you created that will affect potential competitors? How is your company unique? What experience does your management team bring to the company that demonstrates your potential for success?
We’d love to hear your stories and your thoughts. You need to look at accessing capital for your company as a marathon, not a sprint, and learning from each other’s experiences, failures and successes is what business is all about. See you in the comments!