March 24, 2015 | 4-minute read (788 words)
This guest post was contributed by BJ Lackland, CEO of Lighter Capital.
Running a growing tech startup with steadily increasing revenues might put you on the right track to being a successful business owner, but it doesn’t mean you’re on an easy path to securing venture capital. Competition for funding is stiff and VCs are extremely selective. In fact, less than 1% of U.S. startups get venture capital.
Here are six common ways VCs narrow down the list when they consider companies for investment.
Number 1: Big idea and Big Market
Venture capitalists seek a large return on investment (typically 10 times their initial cash within 5-7 years); so they search for companies with a standout idea that matches a breakout market.
Is your idea too obvious? Are there many competitors in your space? You might have a great idea, but an idea is not a product, nor is it a company. If you are still at the ideation stage and you can’t demonstrate product market fit or any evidence of potential customer traction, you will find it nearly impossible to secure venture capital.
Number 2: Industry Fit
Take a look at some venture capitalists' investment portfolios and you’ll notice that they limit their investments to companies in a few industries that match their background and expertise. When you are ready to raise venture capital, make sure you do your research in terms of industry fit. Don’t waste your time chasing investors who are not active in your industry.
Number 3: Entrepreneur’s Network
Venture capitalists almost never decide to make an investment based on a cold email that landed in their inbox. Having a referral from someone they trust is crucial to getting investors' attention. If you don’t have access to someone who can make that introduction, you’ll need to spend ample time building up your network before you reach out to investors.
Number 4: The quality of the pitch
Investors expect you to articulate your business idea and market opportunity clearly and succinctly, whether it’s during an initial phone call, pitch meeting, or in an executive summary. You should also be able to support your pitch with real-life stories that prove you’re gaining customer interest and can ship products. If you’re early-stage, have initial customer data and a long-term fundraising plan at your fingertips. Instead of presenting hypothetical projections, give them true client stories and a product demo.
Number 5: Reasonable customer acquisition costs
VCs care deeply about customer acquisition costs—they want to see that the lifetime value of your customers is greater than the cost of acquiring them. A two to three times return is a great benchmark. It may be difficult to figure out this metric if you’re pre-revenue and have yet to acquire your first customer, but there are creative ways to test your market via marketing campaigns.
You should be ready to answer this question at any stage in your startup's development, as it will determine how easily you’ll be able to scale your business.
Number 6: The reputation of the entrepreneur
Getting venture capital is a process, not something that will be finalized in one meeting. This means that over the course of three to six months, you’ll have to be perceived as someone the VC will enjoy partnering with for at least five to seven years.
During the initial discussions, it’s crucial to demonstrate that you are credible, professional, and trustworthy. Don’t exaggerate or lie to secure funding. If there are discrepancies between the data and your story, VCs are sure to nix the deal.
Being an entrepreneur is difficult. It takes courage to start a business and a lot of persistence to secure funding when investors are always looking for a way to say no to entrepreneurial pitches. And it’s
stressful: if you fail to pass muster, lack of funding can result in the collapse of a dynamic startup.
Even in this era of big data, raising venture capital is still about who you know and how well you can give a presentation.
What are your funding challenges? Tell us about them in the comments section below or contact Early Growth Financial Services for a free 30-minute financial consultation.
BJ Lackland is the CEO of Lighter Capital, an alternative-financing provider for growing technology companies. BJ has spent his career working with emerging technology companies as both an operating executive and an investor. He has been a venture capitalist, the CFO of a public technology company, an angel investor, and a senior finance and marketing leader at tech startups. Follow BJ @bjlackland.