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Some of the world’s most well-known companies came from humble beginnings. It’s no surprise that more people are following in these successful startups’ footsteps, with nearly 5.4 million applications filed to form new businesses in the U.S. in 2021, a 53% increase from 2019. As the economy adapts to the lingering effects of the COVID-19 pandemic, such as layoffs, industry changes and a move to remote working, entrepreneurship around the world is only expected to continue to grow.
But a premium idea is only one piece of the puzzle, as most founders do need the confidence of crucial venture capital (VC) investors to supply the funds in building a top-of-market product and becoming a leader in the industry.
Raising money may feel like somewhat of a formality, but has become a pivotal part of the process of building a startup. For founders who go the VC route, this can be a grueling process. So, how can founders navigate this process?
Here is a shortlist of six rules that may help change how you think about raising capital.
Rule #1: Know your market
Developing a deep understanding of your market and the customers you are serving is crucial — VCs will notice quickly if you don’t. Demonstrating the total addressable market to potential VC firms highlights opportunity and growth potential; while a strong customer base shows you’re creating solutions and if you have the right product for the right market.
For example, in-house legal teams are relatively unempowered by software compared to other in-house business functions such as sales, marketing, or finance. According to a recent survey, 90% of legal teams use three or more software vendors, with 77% spending over an hour per day jumping between various systems to gain a complete view of their work. These insights provide a data-driven edge that business leaders can share with VCs to help instill the confidence that they deeply understand their addressable market and there is a true need for the product.
Rule #2: Start early
This doesn’t mean you need to raise funds straight away; it does mean start talking. While you’ll probably only have serious conversations with five VCs at most, companies speak with as many as 30 VCs when they’re getting started. Fundraising is a long game, and it’s important to meet investors at the beginning of your journey, so you can share a product or vision and receive advice and direction in return. Raising capital is very much like starting any new relationship, it takes time to build trust, so start sharing your startup’s journey and build trust with shared history.
Rule #3: Metrics matter
It will also be extremely important to research and understand what metrics matter to your business. This will not only demonstrate growth, but to most importantly showcase predictability. Everyone’s heard the story of creating companies with crazy “hockey stick” growth. If other metrics suffer, such as customer acquisition cost, adoption or churn, the upwards and right trajectory and growth rate starts to lose its shine.
Many VCs look at annual recurring revenue net growth, gross industry margins, and of course, potential return on investment — so, focus on these key metrics when talking to VCs. Steady predictable growth with high customer and employee retention can also be incredibly appealing to potential investors.
Rule #4: Don’t be just a deck
Meeting a VC isn’t all about the deck. In fact, you may not need a deck for most meetings, until you are formally ready to raise a round. Meeting VCs is as much about building the relationship as it is about the numbers and data you can show in a deck. Take the time to learn, research and evaluate who would be the best partner.
Removing the distraction of a deck can allow you time to build a relationship with potential VC partners and will allow you to really be able to focus on company alignment, fit, focus and vision for the future. Most meetings in the early days may be 30 minutes or less, so time is precious. In the end, it all comes down to people, and the partner you are in conversation with has to be able to secure the buy-in from other members of their funding committee. If successful, your company and team, will be working really closely with that firm. So, liking the VC, the way they operate, the people and their culture is vital.
When it is time to build a deck, however, simplicity is key. Avoid information overload and focus on creating punchy, concise slides that articulate your message and vision. Follow a logical flow that takes your audience through the problem, market, and solution your product provides. Remember, the most important part of a deck is the conversation it creates, so build a deck that tells your business’ story in a compelling and memorable way.
Rule #5: Always be open
The first few rules don’t work if you aren’t speaking to VCs all the time. Once you start thinking of VCs as selling money it changes who the power sits with. Remember their business is all about deploying capital.
Keep yourself open to new opportunities throughout the fundraising process – you never know which relationship might spark success. The National Venture Capital Association estimates that 25% to 30% venture-backed businesses fail, so it’s critical to find a VC that understands your vision and can guide your business’ growth to ensure success for the business and investors.
Rule #6: Enjoy the game
This is a game of numbers and a processes where you lose a lot more than you win. Chances are, you’ll talk to dozens of potential investors and hear far more noes than yeses, so you have to learn to love the ‘game’. The initial fundraising process can take anywhere from three to nine months, so exercise your patience and focus on the small wins. Remember the importance of relationship building throughout the whole process and that it can take several tries to find the right VC fit for your company. Like most games, the more you train and play, the better you get.
Once funding is secured, one of the most efficient ways to secure additional capital is to work towards having current investors double down on their original investment. The key to getting strong follow-on investment is to maintain strong lines of communication with your investors. Don’t just share the highlights, but also share issues and problems facing the business.
Now, you should better understand how to encourage VCs to double down on investments and further increase your position in the marketplace during fundraising. Remember the importance of metrics, that there is a time and place for a slide deck and that starting early will always be your friend. Enjoy the process and remember not to get caught up in the noes.
Despite how difficult the fundraising process can be, particularly as VC funding has hit new highs over the last few years, it is certainly worth it in the end.
Sam Kidd is cofounder & CEO of LawVu.