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Getting funding for your business venture may be one of the most frustrating processes you ever face. By the end of the journey, venture capitalists may remind you of ruthless people who take pleasure in your butterflies and like to see you experience dread when your dreams are on the line. The truth is more nuanced: These people are just trying to be the best in their business, too.<\/p>\n
The job of a venture capitalist, or VC, is to bring lucrative deals to their investors. That\u2019s the end goal. To do that, they need to thoroughly vet every single venture they fund. They look for investments with the highest possible return and the least possible risk.<\/p>\n
On the surface, it\u2019s a simple equation: Rewards must be greater than risks. In practice, it\u2019s nearly impossible to predict how a company will do once funded. Some VCs have a specific, tried-and-true formula they use to evaluate risk and reward. In fact, Clint Korver<\/a> created his own software to do just that. But either way, most venture capitalists have the same basic approach.<\/p>\n In 2015, venture capitalists invested $2.3 million in 536 deals across Canada. So there\u2019s plenty of capital to go around, right? But although according to one study, Canada is the second most entrepreneurial country<\/a> (right behind the United States), venture capitalists can\u2019t fund everything. And they wouldn\u2019t want to, not with a nationwide average success rate<\/a> of just 50 per cent. Instead, VCs focus on projects that present the lowest risk.<\/p>\n There are plenty of things that can sink a business. Many are completely unpredictable. Some of them, however, may be inherent in an organization.<\/p>\n What do most venture capitalists see as the riskiest part of most ventures? Chances are, it\u2019s you, the management. That\u2019s why most investment deals are contingent on VCs having one or more seats on your board of directors.<\/p>\n Anyone, like that kid with the lemonade stand<\/a> down the street, can start a business. But it takes more than an MBA and a passion for cooking to run a successful restaurant, and more than good salesmanship and banking skills to be a CEO. Venture capitalists look for opportunities brought to them by people who have a track record of success in business, the proposed industry, and the market. (That, or one heck of a concept and the willingness to step down and let someone more experienced run the show.)<\/p>\n One of the first things the VC will do is investigate you<\/i>. Does your CV show a track record of successful startups or highly profitable companies? Have you already worked in the industry you\u2019re asking them to fund? Who\u2019s on your team and how well do they work together? Are there holes in your team that need to be filled before you\u2019re likely to be successful?<\/p>\n Part of a VC\u2019s strategy for investigating you and your team will be your online presence. They\u2019ll also ask colleagues about you as an individual\u2014whether they\u2019ve heard of you, what it\u2019s like to work with you, and how well you\u2019re respected. VCs will also want to get to know you in person at meetings, over drinks, while swinging a golf club: in short, situations where you can impress them with your grit, experience at handling stress, knowledge, or just your ability to schmooze. A good executive needs all of those things.<\/p>\n Is your product or idea simply wrong for right now<\/i>? If you\u2019re working on a revolutionary new CD player or an app for self-driving car owners, venture capitalists might be wary.<\/p>\n In the case of the CD player, your product will probably hit the market too late. Sure, people still use and buy CDs, but that technology is on the way out. Even if being completely obsolete is still years away, you won\u2019t have time to turn a profit before what\u2019s left of your market has moved on to smart devices and streaming apps.<\/p>\n In the case of the self-driving car app, you run the risk of hitting the market too early. If it arrives before there are<\/i> any self-driving car owners, you\u2019ll waste money waiting for your market to exist. And what if legislation shoots down self-driving cars before they even hit the road? At this point, a VC might look over your business idea, but you\u2019ll probably hear, \u201cI\u2019ll call you when I<\/i> own a self-driving car,\u201d as they tuck your proposal into their files.<\/p>\n Venture capitalists will analyze your current market as well as what that market is likely to do in the future. If they don\u2019t get a clear picture of a market ripe for the picking around the time you expect to have a product ready, don\u2019t expect a term sheet from them.<\/p>\n When is the right window to seek capital for your company? A good rule of thumb is that a business needs at least three years<\/a> to become profitable. But if you need funding for extensive R&D or lots of equipment up front, it could take much longer. VCs look for timetables that are reasonable for your industry and match investor expectations.<\/p>\n Sometimes it\u2019s not you. Sometimes it\u2019s them. Venture capitalism is a risky business, so investors tend to diversify. If a VC already has a shoe-manufacturing company in their portfolio, it may not matter how much better your shoes are than the competition\u2019s. They won\u2019t risk putting all their pennies in one piggy bank.<\/p>\n Know that in an investor\u2019s experience, some sectors simply tend to do better than others. For example, VCs invested more money in tech<\/a> and communications deals than all other sectors combined in 2013, 2014, and 2015.<\/p>\n Risk is inherent in any business. In the world of a venture capitalist, there is no \u201csure thing.\u201d How much<\/i> risk an investor is willing to take on depends on the other half of the equation: the rewards. The greater the potential for a high return, the more risk they will allow.<\/p>\n Back in the day, Apple might have looked like a pretty risky venture<\/a>. Two young men working out of their garage to build the first personal computers by hand wouldn\u2019t have inspired much confidence in venture capitalists, even back then. The potential<\/i> of the product to revolutionize computing and personal technology, however, was undeniable. Which is why, when the duo waved a purchase order for 500 computers at the manager of an electronics store, the man gave them the parts they\u2019d need on credit.<\/p>\n Unlike the electronics store manager, venture capitalists don\u2019t use their own money to invest. But they do get a large cut of the rewards. They spend months vetting deals for their investors, and if those deals don\u2019t pay off they don\u2019t get their cut; instead, they get angry clients and a poor track record. If they can\u2019t see potential in your product for big bucks, they\u2019ll walk away.<\/p>\n That depends. A venture capitalist will want to know:<\/p>\n The big question in a VC\u2019s mind is whether they can reasonably expect to turn a profit that\u2019s competitive or better than other investment opportunities. It\u2019s not just a matter of turning a profit. Remember: If they invest in your company, that means they\u2019ll have to forgo investing somewhere else. That\u2019s an opportunity cost.<\/p>\n Venture capitalists know that while there are more startups investment opportunities, seed and early-stage companies are riskier than later-stage companies who have proven they can make a profit. VCs make far more deals in seed-stage companies but on average risk less capital<\/a>. Early-stage companies present less of a risk because they\u2019ve shown they can at least bring a product to market and have some initial success.<\/p>\n As long as rewards are big and existing risks are small, I\u2019ll get funding if I find the right firm, right?<\/i><\/p>\n Afraid not.<\/p>\n In between what your company can currently do and what it can become, there\u2019s a long road full of\u2026 well, no one really knows. From unforeseen lawsuits<\/a> and regulations<\/a> to other companies<\/a> entering and dominating the market or a breakdown of relationships<\/a> with platforms you depend on, it\u2019s a perilous world for investors.<\/p>\n Attempting to predict what could negatively affect your business (or simply make it not profitable enough<\/i>) is what venture capitalists are doing when they spend months or even years doing market studies, investigating your company, and getting to know you. Sometimes there just aren\u2019t answers , which is where a VC\u2019s intuition usually comes into play.<\/p>\n While there\u2019s no magic formula for finding the perfect investment, venture capital firms often use financial models to make predictions.<\/p>\n Financial models are a way to turn uncertainties and qualitative facts into quantitative data. Essentially, the goal is to come up with two sets of numbers:<\/p>\n A. The probability of success<\/p>\n B. If success is achieved, the profit it\u2019s possible to make<\/p>\n Keep in mind, both A and B are sets<\/i> of numbers.<\/p>\n Finding number set A will include going over every single element of your business plan to decide how probable certain outcomes are. Using the example of a shoe manufacturer, venture capitalists might look at everything from your material supply chains to marketing costs and the number of niche markets you could satisfy. The result will be a series of probabilities that your business will achieve certain milestones, such as early stage success, niche market success, mass market success, and market leader.<\/p>\n Number set B will be estimates of how much profit investors stand to make if and when you hit those milestones. For example, at hitting niche market success, you might expect a return of two times (2X) the original investment. If you become the market leader, you might hit 8X, and so on.<\/p>\n Most venture capitalists already have targets in mind for number sets A and B. If it looks like your company will leave those targets in the dust, you\u2019ll probably get an offer. If you\u2019re nowhere close, you won\u2019t.<\/p>\n But what if you\u2019re close\u2014either a little bit better or worse than their target numbers?<\/p>\n That\u2019s where a VC\u2019s gut comes into play. And it\u2019s where your professionalism, ability to schmooze, and passion for your business come in, too. If you can get just one or two VCs at a firm excited about your company, they could push the deal through.<\/p>\n Now that you know how a venture capitalist thinks, you can take action. Here\u2019s how you can use that knowledge to increase your chances of scoring funding.<\/p>\n The firm will look you up and down, grill you, and put you to the test. They\u2019ll do their own analysis and research no matter what. But if you can hand them answers to many of their questions before they even start asking, you\u2019ll start to look like you belong<\/i> in their portfolio. This also gives you the chance to anticipate and address anything that might hold up the deal, like lack of experience or the strength of your competitors.<\/p>\n Just as a venture capitalist will find out everything he or she can about you, return the favor. The more you know about who you\u2019re dealing with, the better you can maximize your efforts. Do this before you ever approach a firm. You might learn something that makes you<\/i> not want to work with them<\/i>. Isn\u2019t that better to know before you select who you\u2019d like to invest in you<\/i>?<\/p>\n![\"We're](\"https:\/\/www.salesforce.com\/ca\/blog\/wp-content\/uploads\/sites\/12\/2023\/10\/sales-fails-cta201.png?strip=all&quality=95\")
<\/img><\/a><\/p>\nThe Risk<\/h3>\n
Venture Capitalism in Canada<\/h3>\n
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<\/img> <\/p>\nManagement<\/h4>\n
Timing<\/h4>\n
The Right Fit<\/h4>\n
The Reward<\/h3>\n
The Basics of Calculating the Valuation of Your Startup<\/h3>\n
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<\/img> <\/p>\nYour Product\u2019s Potential<\/h4>\n
Does My Product Have Potential?<\/h4>\n
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What Stage Is My Company in?<\/h4>\n
The Long Road in Between<\/h3>\n
The Different Stages of Venture Capital Investing<\/h3>\n
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<\/img> <\/p>\nStatistics Versus Gut Instinct<\/h4>\n
The Making of a Model<\/h4>\n
Are You Worth the Risk?<\/h4>\n
Your Strategy<\/h3>\n
Do Your Own Research and Do It Well<\/h4>\n
Know Your Target<\/h4>\n