Over the past 2-3 years, the digital economy has been relatively ‘awash’ with funds available to back smart entrepreneurs and their businesses. Sources of funding have included venture capital firms (VC’s), high net worth individuals, strategic investors and so on...with VC’s leading the charge and setting the agenda for how investments are evaluated.
 | The current economic & financial crisis has made access to cash much tougher, with many businesses likely to simply run out of cash in the coming 12 months. So how do you attract VC funding in this new environment? |
 | In any market, successful VC’s always look at the following handful of factors, with each firm placing emphasis on the factors that have been most important in delivering success in their particular portfolios to date. VC’s have got access to tons of cash & since they get paid a 2% management fee on cash invested, they are keen to get it into market for the right investments. |
| It is now more vital than ever that those companies wanting to raise finance can show a compelling case against these factors; |
Step 1: Supersize it!
Demonstrate a large market opportunity in a fast growing sector. This is notably the most important factor for any investor.
Step 2: Focus on Revenue
Show a clear path to achieving significant revenues within 3-5 years and importantly, the ability to command serious market share (25% is the goal of some VCs!).
Step 3: Competitive edge
Show your long-lasting competitive edge. For instance, the solution to a tough problem that hasn’t been solved before. If it’s technology-derived, patent where possible.
Step 4: It's all about YOU and your TEAM
Entrepreneurialism. A VC wants to back a CEO and team that have the vision to see opportunities, the operational track record to build the business up and the flexibility to adapt quickly to market conditions for the advantage of the business. Investors also want to feel your confidence....secure the right team & be bold!
Step 5: Develop your concept
Showcase a developed product vs. an idea. VC’s prefer to back a more developed product and although this doesn’t rule out financing for a killer idea, it does make the market very tough for start-ups with only a plan on paper.
Step 6: Pay attention to location
Location, location, location.......show that the business has access to a great talent pool where it is located
Step 7: Focus on the business opportunity only
DO NOT present your business / idea as a lifestyle choice. No VC on earth is interested in your more balanced quality of life!
 | All well and good......you performed brilliantly against the above. In a bull market, a VC might be opening their cheque book at about this time. That’s not the case today......it’s also vital to think about the following; |
Step 8: Plan ahead
Plan in advance and make sure that you have time and options around raising the next round of finance. If you are up against it & need more cash now (& I’m assuming that you have already managed the cost base tightly / cut your costs wherever practicable), then prepare to get real on price to attract your funding. Let’s face it; a small part of something valuable is better than 100% of nothing!
Step 9: Prepare for deal flexibility
Prices will be at their lowest in this cycle over the next 12 months, so raise as little as possible to achieve your business goals & seize opportunities. On deal terms, read the small print on liquidation / disposal proceeds preference, favourable conversion rates for convertible loan stock etc. You will no doubt have to be prepared to make some compromises here to achieve your VC funding.
Step 10: $$$$
Emphasise profitability, revenues, cash flow & customers – these are more significant than ever in today’s market
Step 11: Manage relationships carefully
VC’s are more likely to support existing investments over new ones so look after any existing VC relationships very carefully.
Step 12: Seize tactical opportunities
Bring strategies to a VC that are relevant and timely to attract support. For instance, this market is likely to provide intelligent consolidation opportunities, so think about how your company adapts to market conditions today & don’t simply plough on with the plan that you created months ago when the markets were very different.
This is not a market for the faint-hearted but it is definitely a time when some exciting businesses will be built on strong and sensible foundations. Good Luck with raising that cash!
