Entrepreneurs Before looking for VC, Build product to at least Alpha stage so that VC will get a grasp about your product and in parallel build Good Business Model before meeting VC.
Do not fully concentrate on funding, first build great product then all else will follow.
Business Gyan has a great article about Venture Capitalist by Sanjay Anandaram from Jumpstartup.
“VCs don’t want to take risks”! “Hey, you claim to be in the risk capital business, so why can’t you take a risk and fund my young company?” “I’ve been trying to get funding for my startup but no VC gets it, they don’t understand what I’m saying!” “Gosh, they want me to make more progress but how do I show progress if I don’t have money?” “They want to take a significant stake in my company when all I want is some money!”
And the litany from entrepreneurs frustrated with their fund-raising experiences goes on and on. Having been on both sides of the table, first as an entrepreneur and then as a VC, I’ve presented some ideas here that I hope will be of value:
a) Understand what a VC does: A VC is a not a bank or a financial institution that lends some money against collateral. In India, the distinction between a VC and private equity (PE) investor isn’t very clear. An early stage VC typically invests small amounts in young, fast growing companies that have the potential for delivering 10X+ returns on the money invested – usually within a 5 year period. There’s no collateral and the investments are in the form of equity with no financial engineering involved. It is a high risk investment and so the involvement of the VC is high. Empirical data of VC investments suggests that about 50% of the companies lose all the money invested, about 30% deliver marginal returns, while the balance 20% deliver the super-normal returns thereby ensuring that the portfolio delivers an attractive return in the aggregate. Now, you can see why VCs look for the possibility of very high returns. [...]
b) There are different types of VCs: They can be largely segmented based on their preferred investment stages (e.g. seed, early, expansion), sectors (e.g. technology, services, healthcare, medical devices, clean-tech), geographic focus, minimum investment sizes (e.g. some VCs will not invest less than a certain size). Pitching a technology startup therefore to a VC who largely invests in services isn’t likely to generate much interest. Do your research on the VC!
The 5 key Specifics
a) Team: This is the most important aspect of a VC’s decision making. Given the high risks of the venture and the minimal downside protection, the only real collateral the VC has is the team. Integrity, academic background, work experience, ability to deal with high pressure and challenges, ability to attract and retain customers, employees, and partners, are some of the qualitative criteria that VCs use for evaluation.
b) Market: What is the problem you are trying to solve? Is it a real customer issue or is it a “nice to have” thing? Is there a market for your startup’s offeings? Is it large? Is it growing? What is the competitive landscape like? How many potential customers have been spoken to?
All too often entrepreneurs say: “According to various market research analysts, the market size will be over US$5 billion in 2010. I’ve made a very conservative estimate of a market share of just 1%, so I’ll be a US$50million business”. Well, its like saying there are 6 billion people in the world and all I have to do is sell my Rs 50 T-shirt to just 1% of them to be a Rs 3 billion company! Easier said than done, don’t you think? Remember, VCs read the same research reports!
c) Offering: What exactly is your offering? Why is it different from those in the market? How can the uniqueness be sustained and defended?
The ability to clearly define what your offering is and the articulation of the benefits (not features) of the offering are critical. Is there defensible intellectual property in the offering? Why cannot someone else do the same thing? How will the innovation be protected? Is the competitive advantage in the business model, in the supply chain, or in the partnership arrangements? Again, how defensible are these? Is there a road map for the maintenance of the competitive advantage?
d) Model: How will your company make money on the bottom-line; is it clear? How much will customers pay? Why? What is the customer acquisition cost? What is the go-to-market plan e.g. OEM, license, direct, channel? Is there a partnership plan? How will customer support be undertaken? Is there a monthly financial plan especially cash-flows, in place? Any what-if scenarios planned?
What kind of partners does your startup have? Remember, tying up with another cash-starved company isn’t going to do you a lot of good. Two poor people don’t make one rich person. Find partners who are better, bigger, and have more money.
e) Valuation: How much cash will the company likely consume before it breaks-even? Will there be other investors interested in the company? How much can this company be worth in a 3 to 5 year horizon? Can it go public? Can it get acquired? What is the entry valuation?
Rest about Reaching out to VCs and Presentation here.
If you have any good link about VC’s and Startups please leave in the comment’s. It would be a great help for aspiring entrepreneurs.
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