Venture capitalist (VC) investors receive thousands of pitches from start-ups every year. Why? Because these growth investors can boost a start-up towards a successful future. After all, companies like Facebook, Twitter and WhatsApp all relied on early investment and generated massive returns for early backers.
If you are a small business pitching to a VC, be aware that out of the thousands of pitches made, only around 1% convert into real-life investments. In this blog, I’ll explain what VCs look for, and share some tips and tricks for successfully pitching.
What do venture capitalist investors want to see in start-ups?
VCs are always looking for a unique, standout business. The kind of disruptive, innovative idea that could change the world. Most of all, they’re looking for a business that will bring them at least ten times their initial investment in fewer than seven years.
The easiest way to think of it is that VCs are looking at people, not plans, when they decide to invest. You need to get them to believe in you, your idea, your brand and your financial projections. It really is the whole package they’re looking for, an no matter how precise your business plan, if you can’t deliver it all, they’ll move on. So, you need the idea, a plan, projections and passion, commitment and energy.
Investors want to back businesses that have potential to be massive and that can feasibly lead within an identified business niche.
Finding a venture capitalist investor
Generally, start-ups are referred through networks of contacts. It’s a risk to blindly approach people, as it’s easy to get it wrong. VCs and investors tend to stick to specific business areas, so research can help you. Associations like the British Private Equity and Venture Capital Association (BVCA) are helpful to find out what investors have backed in the past.
It’s important to do thorough due diligence on the investors you’re interested in, as if you do get backing from someone, it’s difficult to cut ties later on. Contact companies that have received funding from the investor you’re thinking of approaching. Ask them directly what you should know about this VC. People will generally help, and it’s a great way to get introduced to a VC.
Don’t try to approach investors who have never invested in your business niche or sector, or who don’t generally invest the amount of money you’re looking for. Some professional firms, such as Pricewaterhouse Coopers, run initiatives to help start-up founders by connecting them with potential investors.
How does funding work?
Funding rounds are split into Series A, Series B and Series C. Each category links to the stage of development of the start-up searching for funding.
Series A funding shows that your business start-up can scale quickly and has proven itself already. It demonstrates that your start-up will give investors a fast return, and ideally is for a proven product that comes with angel investor backing. Series A funding usually reaches up to £2.5 million in rounds of between five and six million.
Series B onwards is about building the business. This could mean expansion overseas, developing and launching new services onto the market, or scaling revenues. By this round, start-ups are way past early development stages, and should be planning to expand their reach. Your start-up will have to compete against bigger and much more well-established competitors.
If you are nearing a place where you are about to turn a profit, you could be ready to go for Series B funding. Remember that this stage is not about potential, rather it’s about proof that your business is walking the talk. VCs will usually invest between £10m and £15m in Series B funding.
Series C is when a start-up has already proven to VCs that long-term success is possible. You should also be able to show early investors how much their shares have leapt in value. This stage of fundraising can feasibly be used to buy up a smaller competitor or get ready for an acquisition. At this point, the VC will want to start exit discussions.
What else do venture capitalists offer?
VC firms aren’t just offering financial backing to the start-ups. Other offerings can include help with recruiting staff, introductions to potential customers and easier access to follow-on funding.
Often, VC funds will offer the following kinds of help:
- Support services: Bigger VC firms come equipped with in-house legal, marketing, recruitment and tech teams that are ready to offer services to start-ups and small businesses.
- Introductions with clout: Experienced VC fund partners and entrepreneurs have a wealth a contacts that they will offer to businesses they are investing in. These strategic introductions can lead to possible partnerships with new investors, clients or even bigger corporates.
- Strategic assistance: A VC partner can help the small business to formulate a strategy and ensure that it is working properly.
- Market understanding: VCs naturally have a much wider understanding of market conditions than a founder, and this can give you valuable insight into everything from overseas markets to new clients.
Preparing for a meeting with a VC fund
Your business plan is vital to your success. Remember that VC investors see hundreds of these every week. Yours must stand out for the right reasons. Include all the relevant, important information right at the top of your proposal document.
You have to grab their interest immediately, or they won’t bother to read the rest of your plan. You should also send your pitch deck over before the meeting. Also come equipped with information on the kinds of companies these VCs have already invested.
When you’re face to face, you must present a polished plan, usually using PowerPoint. They will expect to see information on the background, the team behind it, the service or product, the size of the opportunity and, of course, the financial projections.
This sounds like a lot of information, but you must be succinct. The pitch deck should be no more than 12 slides. Ensure you include:
- The statement of purpose.
- The team behind the start-up.
- The problem that you have identified that can be solved with your start-up.
- The solution to the problem that your start-up provides.
- Explain why your company can do this now.
- How you will generate money – this should include a five-year projection for revenue.
- The size of the market.
- How investors can make at least a 10x return on their funding.
Brush up on your presentation skills
Presentation skills and confidence are key for the meeting. Remember that clarity and succinct information will help you to stand out from the crowd. Have back up plans ready for any questions about your initial vision crashing.
Don’t be overconfident and overstate the strength of your proposal. Being upfront about potential weaknesses in your plan will stand you in better stead than over promising. Never be defensive and be receptive to any conversation a VC starts. Think about it as an exchange of ideas, rather than an interrogation in the style of Dragon’s Den. VCs want to make money and they want to understand why they should invest in your vision to do so.
Ideally, leave the meeting with actions already agreed. It’s not unreasonable to set a deadline for your VC to show interest in investing, but if you do, you need to stick with it. Remember that you need just one ‘yes’ from a VC, and persistence is important. If your meeting does not result in funds, ask for feedback and adjust your next pitch. And keep trying.