Ling Lee
Ling Lee, at Digital Marketing and Personal Branding

Investor funding and capital

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

Hi all,

I am considering going to a venture capitalist for my startup, but I'm extremely weary of what they will demand in return. What can I expect from them, and what is considered a reasonable demand? 

Ling 

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1 Answer

Steve Osborne

Steve Osborne , director at Smarthinking

Hi Ling, 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 VCs 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.

Ling Lee

Ling Lee, at Digital Marketing and Personal Branding

thanks for the awesome answer Steve :D... read more
thanks for the awesome answer Steve :D
Lisa Ormenyessy

Lisa Ormenyessy, Business Coach and Marketing Specialist at Straight Talk Group

Ling, just some random thoughts. Other things you may like to consider during this process is how much is this start up worth to you to see come to fruititio... read more
Ling, just some random thoughts. Other things you may like to consider during this process is how much is this start up worth to you to see come to fruitition. How passionate are you about this idea? The VC relationship can not be viewed solely on the dollars. Most 'big' ideas require a team. Consider what each person will bring to the team, ie leveraged relationships? Skills? New Markets that they are already in? If it is just about the dollars (as as Steve has put so rightly - go to a bank) If its about the percentages... remember its better to have 1% of something worth a lot than 90% of something not worth much. Good Luck!
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