Seeking venture capital investment is a pivotal moment for an emerging startup and its founders. The VC industry is large and the process of securing capital can be complex, so it’s really important to carefully prepare, assess your company and your product and know what you need before going after VC support.
7 Questions to Ask Before Raising Funding
- Is this the right time to seek VC funding for my startup?
- What is my game plan?
- Who are my competitors?
- Who are my customers?
- Do I have the right team in place?
- How Much capital should I be asking for?
- How do I find the right VC firm?
Over my 25-year career in finance, I’ve worked with entrepreneurs and founders at nearly every stage of a startup, and I’ve gleaned a lot of invaluable tips on how to succeed in the VC process. Based on those experiences, here are seven questions every startup needs to answer before they start pitching VC firms:
1. Is This the Right Time to Seek VC Funding for My Startup?
Is it too early? Are we ready? When it comes to seeking investors, timing matters. If your startup hasn’t established a revenue stream, attracted some customers and plotted a detailed and plausible plan for growth, then it’s likely too early to start pitching your slide deck to VC firms. Investors want to see a company that is gaining traction in the marketplace and building a history of early successes. Ultimately, VCs are looking for a 5x return on their investment, at a minimum, and they need to see evidence that your startup has what it takes to generate that kind of revenue.
In the early days of Covid-19, there was a huge spike in investor funding for startups. A lot of companies that had not produced revenue had secured funding, only to quickly run out of money. These companies either had to fold, or they had to prematurely go back to investors for additional funding. That can be the kiss of death, as a startup can lose the confidence of the investor community by asking for more money. These Covid-era startup failures can serve as a warning to today’s founders to not jump the gun and take on investors before they are ready.
2. What Is My Game Plan?
It might sound obvious, but you need to have a comprehensive business plan that demonstrates you have thought out every angle of how to build a thriving company. You need to spell out your milestones and when you plan to achieve them, including when you will take your product to market and when you will achieve positive growth. VCs want to know how much capital you need to achieve your milestones. If you don’t have answers to these questions yet, it’s unlikely you will be able to capture the attention of investors.
3. Who Are My Competitors?
You need to have a thorough and realistic outlook on your product. It’s easy to get wrapped up in the excitement of what you are building, but before pitching to investors take a hard, objective look at your product and its competition. Is your product the first of its kind? How is it different from other solutions? Is the product the best it can be, or are there changes that will make it more competitive? Demonstrate to potential investors that you know the market you are operating in and that you are set up to own your niche.
4. Who Are My Customers?
VCs want to see revenue and growth before they are ready to invest in a startup. They want to know who is the target market for your product, and how big that potential market is. It’s up to you to demonstrate that you know your customer base and that there is enough potential out there to achieve your growth milestones.
5. Do I Have the Right Team in Place?
VC firms also want to see that you have experienced people in the right places in the organization. Do your sales, operations and marketing teams have the right leadership in place to help the business reach its goals? Who is on the board of directors? Do you have experienced mentors or advisors lending expertise as you build the company? Investors are going to look at the executive team, and they want to see that the people there have the knowledge and expertise to execute your vision.
6. How Much Capital Should I Be Asking for?
This is a really important thing to determine before you go looking for investors. You want to ask for enough money to meet your growth goals, but not so much that you turn investors off. The standard is about 20 to 30 percent of a company’s valuation. If your company is valued at a million dollars, asking for $200,000-to-$300,000 is reasonable.
7. How Do I Find the Right VC Firm for My Startup?
Do your research. Talk to the VCs who are experts in your field. There are VCs out there who are specific to certain vertical markets, such as bio, pharmacy, IT, tech, etc. Look for a VC who matches what you do. If you are building a mobile app, a bio/pharma VC isn’t going to invest in your company. Look for a firm with a portfolio of companies that are complementary to yours. Learn what the firm’s investment strategy is. What’s their niche? Can they introduce you to potential clients? Pairing up with the right VC can definitely help propel your company to success.
It is essential to ask questions. This can be tricky because you are trying to convince these firms to give you funding, and you don’t want to step on their toes. Regardless, you need to understand how the relationship will work before you enter into it. How hands-on will the VC firm be? What is the vision for the startup from the investor's point of view? What is their follow up strategy? Is it hands-off, or will it be a mentorship and guidance situation? Would the investor be interested in a SAFE or in convertible notes? Who will be leading the round for funding? Is it up to the startup to go looking for that lead round? Or will the VC help, or will they be the lead? Will they be taking board seats? You want capital from these firms, but ultimately you need to be comfortable with the terms of the deal and the relationship that will be locked in after you receive the funding.
It’s not unusual for founders to get so wrapped up in the excitement of their work that they fail to gather all the data and evidence they need to convince investors that they should be excited too. Ask yourself the hard questions before you get in front of VCs so that you are well prepared to quell any skepticism and prove that you have what it takes to be the next big thing.
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