Debra Gorman

How can I get a venture capitalist to pay attention to me?

How can I get a venture capitalist to pay attention to me?

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2 Answers

Steve Osborne

Steve Osborne , director at Smarthinking

Debra

A similar question* was asked some time ago by one of the Savvy community. Ling asked:

"What can I reasonably expect from venture capitalists for my new startup?"

Altho' you may or may not be a startup in the traditional sense, I think the way you get VC's to pay attention to you is to give them what they want. Here is the answer I gave back then, which applies equally to your question:

Without knowing what your startup is about, my comments are pretty general. Therefore, it depends. Amongst many other things, it depends on what industry you're in, what the scalability potential is like and how much skin the founders have in the game.

The first and most obvious thing to say is: they expect a return. And that mighty quick.

My experience preparing business plans for VC investment taught me several things – the most important being:

1. your idea is worth precisely zero until it is implemented. Investors want to see a working model.

2. investors are taking a big risk, therefore will expect a big return. After all, if your startup is not doing something that's never been done before, by definition it's just another business. And if all you need is money, go to the bank.

So expect them to ask for at minimum, 30% return over 3 x years on say, $1mill.

3. investors are most interested if you can clearly show your three different customers. If you can define these three distinct groups early on, you stand a better chance of growth and a better return on exit.

A wiser man than me defined them thus:

Customer One is your end-user. It is to serve her needs that your business was created. Without this customer, you don't have a business.

Customer Two is your bulk-buyer. This second customer is the one on whom rapid expansion will pivot, based on the idea that it's easier to sell to one who buys 1,000 than it is to sell to 1,000 who only buy one (customer 1). This customer shapes the speed and scale of growth.

Customer Three is the business buyer. This is the entity that will eventually buy your business. This individual or company will ultimately make more from your assets (customers, database, products) than you can. This customer shapes your positioning, your customer information collection, your database. And this customer is the most difficult to identify.

But it's this last customer the VC's are most interested in, because that's where the greatest value lies. If you can demonstrate a firm grasp of how each customer group is linked, you can argue a simple and very powerful case for investment. Everything else is just logistics.

Ask Neil at Wardour Capital about this stuff. He is the expert.

**Note to SavvySME Questions Admin: there is no system available within the site to refer to previously asked questions, if they were answered more than a few months ago. Perhaps a form of cross-referencing could be devised so questioners could find out whether their question already has an answer?

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Jef Lippiatt

Jef Lippiatt , Owner at Startup Chucktown

Debra,

One of the most important ways to get a venture capitalist excited about your business is by looking for the right connections.

You don't want to approach just any VC. You want to approach VCs that are interested your business industry or type of business.

You also need to customize information you are sending to individual VCs so they can tell there is a personal touch (don't blast out stock emails to a bunch of VCs).

One of the best ways to attract investors is to have you business positioned correctly. There are key metrics that VCs find more tantalizing than others, so know them.

Some questions and metrics to keep in mind:

  • Do you have a repeatable method of monetizing your business / users?
  • Are you cash flow positive? If you aren't, when will you be?
  • What is your cash burn rate per month?
  • How many Monthly Active Users (MAU) do you have? Is it increasing?
  • Who is on the team and what are their areas of expertise?
  • Do you currently have any mentors or advisors? What are their strengths?
  • How much money are your trying to raise?
  • What will you do with that amount of money specifically? How will it help the business?

If you can answer more than half of those questions, you should put a slide deck together or start looking for pitching opportunities. If you can't answer even half of those questions, wait until you can before approaching a VC.

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