Business Magazine

When, Where, and How to Raise Venture Capital

Posted on the 19 February 2011 by Martin Zwilling @StartupPro

raising-capitalBy Dave Lavinsky, President and Co-Founder of Growthink

At one point or another, most entrepreneurs find themselves in a place where they could use money. And oftentimes, they could use a lot of money. These entrepreneurs often dream about how much they could accomplish if they had millions in the bank. All the people they could hire. All the products they could develop. All the marketing they could do.

And as they sit and dream, most entrepreneurs think about venture capitalists. Venture capitalists, or VCs, are the folks with millions upon millions of dollars to invest in companies such as theirs. This includes the folks that funded Google and Yahoo and Netflix and Ebay, and many of the great recent companies which were able to start and grow to massive scale in just a short period of time.

And for a select few entrepreneurs, they are able to go out and raise the venture capital they need and make their dreams a reality. So, what it is about these select few entrepreneurs, and what do they do that makes them successful in raising venture capital? Below are the three core things they do:

  1. They go after venture capital at the right time. Venture capitalists generally are not interested in funding companies at the idea stage. They want to see that you have taken some of the risk out of the venture by developing prototypes, gaining beta customers, and possibly already generating initial revenues.

    If you haven’t accomplished any of these things, you might want to raise funding from angel investors and other sources to achieve them. And then go back to venture capitalists later.

  2. They make sure they are a proper fit for venture capital. Venture capitalists swing for the fences. They aren’t interested in getting a 1X or 100% return on their investments. Rather they seek a 10X or 1,000% return on every investment they make.

    VCs aren’t naïve, and understand that the majority of their investments won’t pan out. And so they need the ones that do pan out to have enormous returns, which can give them a high return across all of their investments.

    Now, not only does your company need to have the potential to give a VC a 10X return, but it has to meet two other key criteria. First, it needs to be able to grow quickly. Venture capitalists generally want to see a return on their investment within 5 to 7 years. As such, you need to be able to grow quickly and get acquired or go public within just a few years.

    A second criteria is that the investment size and return has to be big enough. No matter how exciting your company is, no venture capital firm wants to invest only $100,000 in it. Rather, VCs generally invest no less than $1 million in any one company. And for some VCs, that barrier is considerably higher. Consider that some venture capitalists have billion-dollar funds; these VCs can’t possibly invest the time to fund and manage thousands of small investments.

    So, to sum up, your company must have the potential to grow very rapidly, provide a massive return on investment, and be worthy of a multi-million dollar investment (which typically means that you will be able to sell for $50 million, $100 million or more within a few years).

  3. They go after the right VCs. All VCs aren’t created equally. Some prefer to fund healthcare companies. Others prefer software. Most only invest within 200 miles of their offices. Some will only invest very large amounts of capital.

And even when you target the right VCs, chances are that they’ll say “no”. The fact is that VCs are bombarded with potential deals to fund. And even if you’re the best deal, you won’t always win (just like the prettiest and most talented woman generally doesn’t win the pageants since a certain degree of luck and noise typically kicks in).

So, raising venture capital is a numbers game. You need to create a large list of investors that are a fit (e.g., based on your geography, sector, amount of funding you are seeking). And then you need to methodically contact and meet with them.

Importantly, the best thing you can do to get a venture capitalist to invest is to let them know that other VCs have shown genuine interest. It’s all too easy for a VC to play the waiting game with you….to say that they’re interested but want to see your company progress (and minimize their risk further) before they invest in you.

But once a VC sees that they might lose the opportunity to invest in you, they often get more aggressive in taking the next steps to fund your company.

Raising venture capital is possible. And it is often the most important step an entrepreneur makes in building a highly successful venture. So follow these steps and make it happen!

#####

Today’s guest post is by Dave Lavinsky, who has taught thousands of entrepreneurs how to raise venture capital. Learn more about Dave’s Venture Capital Pitch Formula from his Growthink blog, or contact him directly at davel@growthink.com.


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