Looking from the outside in, the process of raising venture capital can seem daunting. Any respectable piece of advice on the topic will point out that the vast majority of such efforts fail and that the art of putting together a successful bid for capital is often the art of failing again and failing better.
In many senses this is a simple and honest reflection of the fact that businesses in need of investment outnumber venture capitalists seeking somewhere to invest by a frankly eye-watering factor. Examine a few figures in detail, however, and it becomes clear that the economy has strengthened to the point at which investors are increasingly willing to take a chance on businesses at all stages of development, provided the people ‘selling’ that business can construct a case strong enough to reduce the perception of any risk involved to the bare minimum.
The latest figures collated by the British Private Equity and Venture Capital Association (BVCA) revealed that investment made by members of the BVCA, within the UK itself, amounted to £4.7bn during 2014, up from £4.1bn the year before.
Clearly, then, the money to invest is out there, and the key to making sure it flows toward your business lies in preparing the strongest possible bid – then going back to the beginning and preparing it all over again. As the 10 tips below illustrate the key to any successful attempt to raise capital lies in attention to the detail; of business plans, of all relevant figures, of the team around you and of the story you wish to set out. Make sure you know who you’re seeking investment from, who your competitors are and, most vitally, who you are and what you’re offering. Put simply, you can’t know your business too well, nor describe it too clearly, and what follows is a framework to support that process.
- Ready for show time? Is your story compelling enough to interest venture capital investors? Some businesses, even if they succeed, simply will not get large enough to deliver the kind of scaleability and potential future returns that venture investors often seek. Do you have demonstrable results? Customer traction? Patented intellectual property? Consider raising a small amount of money from angels or from friends & family first in order to reach important milestones that will make your business more marketable to venture firms. Consider whether you want to raise money in the form of equity, debt or a mixture of the two.
- Documents. Prepare three documents: (i) a thoughtfully reasoned full business plan; (ii) a one to two page executive summary of the business plan; and (iii) a presentation. A full business plan should include a business model, detailed information on your target market, financial projections and assumptions. Remember: even if most investors do not read the full plan, the process of writing it will help you better tell your story and address questions from investors. Be sure that you can defend each fact, assumption, projection and conclusion that you include in these documents. If you are not a good writer, ask a friend who can help or hire a good writer.
- Build your core team. This is critical to investors, and it is important to articulate clearly your background and experience, who has joined the team and who will likely join the team. Do the founders have money or meaningful “sweat equity” in the company? You want to impress upon investors that you have the committed team members necessary to take the next steps toward your vision, and indeed that you are able to identify any gaps to be filled in the future.
- Build your team of advisors. Surround yourself with good advisors who are experienced in raising venture capital, whether board members, lawyers, accountants, professional investors or industry experts.
- Target list. Create a target investor list using key criteria including: (a) industry sector; (b) investment stage (i.e., Seed, Series A, B, C, etc.); (c) amount to be raised; (d) comparable/competitive companies; and (e) potential investor contacts. Find out as much information as you can about the current investment status or activity level of your target investors.
- Details Matter. Know your numbers and models inside out when preparing your pitch. Investors will want to know about your credentials, market conditions, your data, plans for scaling up and to tell them something they don’t know.
- Practice your pitch. Find a friendly audience (including at least one experienced investor) who can help identify gaps and weaknesses in your pitch. Be sure to have a 30-second version, a three minute version and a fifteen minute version. You must be able to articulate your vision succinctly and in plain English. When you make your actual presentations, space them so that you can incorporate feedback and suggestions in subsequent pitches. If you cannot clearly explain your business (and why it is different) in three minutes, investors are often out the door.
- Competition. Know your competition and be prepared to distinguish your business model. Saying that you do not have competition is often the wrong answer.
- Understand your capitalisation table. If you don’t understand the basics of a company’s share capitalisation, then ask someone to explain it to you (g., the difference between issued shares, reserved option pool and granted options; preferred shares vs. ordinary shares etc.). Prepare a detailed capitalisation table. Know exactly who owns each share in your company. Document share options right away, and avoid vague, open-ended or ambiguous future equity promises, such as offering someone a percentage of the company – be clear that you are offering them a percentage of the company as of a particular date or event. Don’t leave equity arrangements unwritten.
- Be ready for the next stage. If you get a “bite”, be ready to proceed – which will involve the investor wishing to carry out due diligence.
By David Bresnick, corporate lawyer at Cooley LLP