6th October, 2017
You’ve probably heard about all sorts of startups being funded by venture capital (VC) – but before you start dialing VC offices with well-honed pitches you need to know whether it’s right for you.
According to consultancy KPMG, VC investment in Australian companies hit a grand total of about $290 million in the second quarter this year – which was a near record.
So, are your chances of landing a company-making VC deal now greater? Possibly, but only if your company is the right fit.
VC firms knock back a heck of a lot of pitches (hundreds per year) – so very few applicants, proportionally, actually attract investment.
Co-founder of VC firm Blackbird Ventures previously told The Pulse that VC was only really right for a few companies.
“Venture funding is for a very limited set,” said Bartee. “It’s only right for companies that want to take it to the next level and hit the hyper-growth area.”
So before you spend countless hours refining your pitch and getting your hopes up, it pays to get a firm grasp on what VC actually is and what role it can (and can’t) play in getting your venture funded.
Venture Capital refers to a special kind of investing, where firms will invest in early-stage companies in return for equity (or a share in the business).
So a seed round may involve a VC firm taking a 10 percent stake in your business in return for $1 million, giving your company a valuation of $10 million.
They are looking for companies with long-term potential – as they generally make their money by investing early, and then selling off their equity at multiples of their original investment (they may also be after dividends along the way).
This strategy carries a higher degree of risk, but also attracts a higher potential return for the VC company.
The way VC firms invest is by placing bets on a series of companies – using the return on the one or two companies that hit it big to fund their next round of investment and so on.
Typically, a startup will reach out to a VC firm when they’re ready to hit the accelerator and go to the ‘next level’.
That ‘next level’ can be things like international expansion, a customer acquisition drive or investing in warehouse space.
If VC funds are potentially laying down millions of dollars, they want to make sure they get a bigger return on investment – so ideally they’re looking for businesses that are globally scalable.
Aside from just providing cash and becoming a passive equity holder, they’ll often want a say in how things are run.
This can be a double-edged sword, but the key reason VC firms want a say is because they want to maximise their return.
It’s about making sure your goals and the firm’s goals are aligned before you sign on the dotted line.
The investors are often experienced and have a wealth of connections to help a young company out on its journey, and give it the best possible chance of success.
It’s very much a symbiotic relationship.
So let’s say you think your startup is a good candidate for VC funding – how do you give your company the best chance of success?
One of the most important things you need to demonstrate to a VC firm is how your particular company is a truly unique opportunity – how is your company better than the hundreds of other opportunities brought to the attention of a VC firm?
VC firms are looking for truly unique ideas that have the potential to be disruptive. They’re looking for companies with lofty ambitions rather than ambitions of plucking low-hanging fruit.
Show them what problem you’re trying to solve, why you’re the company to solve it and how they can make money if they invest in you.
You should also make sure you do your research on the VC firm itself, as one of the common mistakes startups can make when it comes to VC is assuming all funds are basically the same.
That’s not the case.
For example, one VC firm may specialise in fintech, another agritech and another still medtech.
At the end of the day, while you may see a lot of headlines about VC firms funding startups, VC is only right for a few companies.
So better you’re prepared before spending a whole lot of time and energy chasing funding when there are other sources available.