4 Things Your Startup Needs to Attract Venture Capital
Published on May 6, 2013 by Elisha Hartwig at Mashable
So you’ve finally finished developing your product or service, flushed out your business model, and you’re ready to dive head first into your new business venture — but how the heck do you raise enough capital to get started?
Taking venture capital is one way to secure the funds necessary for starting your business. According to recent statistics from Reuters, venture capital firms invested over $4 billion dollars in startups in 2012, and more than $900 million was invested in the first quarter of 2013.
Although there is a lot of potential with venture capital firms, it is important to make sure this is the right path for your startup. In exchange for the high risk that venture capitalists assume by investing in your company, they generally receive significant control over company decisions — in addition to a portion of the company’s ownership. But, VCs can definitely be an attractive option for startups unable or unwilling to secure bank loans or complete debt offerings; so, if you’ve decided that applying for venture capital is the right move for your startup, read on to learn about the must-have traits your business needs to attract funding.
1. Have a Unique Idea With High Barriers to Entry
In order for venture capitalists to justify the large risk they are taking with your company, you must offer them a fresh business venture that promises to fill a void in the marketplace. In an interview with Mashable, Charley Polachi, partner at Polachi Access Executive Search, elaborated on the importance of having a truly unique idea with high barriers to entry.
“Venture capitalists are looking to fund projects that are unique and can’t be easily replicated. Ideally, the technology or service can be patented or trademarked to give the startup some breathing room and really allow the business some time to gain traction and marketshare.”
Anyone can sell something online, but there are certain products that have yet to be developed — like the car battery that goes forever, or innovative, accessible and low cost energy sources, these are the ideas that venture capitalists would drool over — they are motivated by the next big thing like anyone else.
2. Develop a Compelling Value Proposition
Venture capitalists are really knowledgable in the startup space, so you must be able to show them why your business is different and better than each of your competitors. Showing VCs that you have a compelling value proposition is hugely important, and is often overlooked by first-time entrepreneurs.
Michael Goldstein, founder of DC-based startup accelerator Exhilarator, stressed the importance of determining customer interest.
“My personal gauge when evaluating a startup is, would the target customer wait in line for five minutes to get access to the product/service, or would they abandon? If it took five minutes to download an app or to access a site, would the customer persist?”
Another important factor of creating a value proposition is scalability. Are there enough people interested to scale the business? Even if you have a really cool, unique idea, it’s not fundable if it’s not scalable. What market are you going after, and how large is it? Investors need to believe that the market opportunity is sizeable, and that your company can generate substantial revenue at scale. Prahar Shah, CEO and co-founder of Mobee, elaborated on the importance of recognizing the opportunities in your market of interest.
“Be sure to size the market correctly and educate the investor not only on how large your market opportunity is, but also why it’s ripe for disruption. When I asked one of Mobee’s investors why he decided to back us, he quickly responded: ‘You’re going after one of the only billion-dollar industries — Mystery Shopping — that’s still run on pen and paper!’ ”
So, the takeaway is this: If your business is a product, demonstrate that people are willing to pay for it and have an unmet need that your product fills. If your business is a marketplace, be ready to show traction on both supply and demand sides.
3. Demonstrate Market Traction
In a competitive economy where only 2.5% of angel-funded companies go on to raise venture capital, it’s important for a startup to show cognizance and relevance in their market. Early-stage VCs want to see a sizable market opportunity before writing a check, and startups can demonstrate this through a pilot or beta customers.
More importantly, startups should demonstrate the ability to convert that pilot into a paying customer. Nina Nashif, founder and CEO of Healthbox, believes that showing market traction is critical, and startups should be able to replicate the process of turning a pilot into a paying customer over and over again. “The greater the number and the quality of early customers displays the startup has the ability to grow past the initial interest from early adopters.”
4. Assemble the Perfect Team
Some think that having the right team is the most important factor in attracting venture capital funding. Startups rarely have the perfect product and market fit right away, and they will probably need to pivot based on customer needs, competitive factors and industry transformation.
Ryan Feit, CEO and co-founder of SeedInvest, an equity-based, crowdfunding platform that connects investors to high-quality startups told Mashable about the importance of finding the right team.
“Given the high degree of uncertainty associated with early-stage investing, VCs bet on the jockey over the horse because they need to have a high level of conviction that the team has the necessary skills, domain expertise and diversity to evolve just as quickly as the industry does.”
So whether your team is made up of experienced entrepreneurs, or recent college graduates — as long as your team members have complementary skills with a track record of collaborating well, you should have a solid shot at attracting some venture capital funding.
How did your startup attract VC funding? Let us know in the comments