9 Tips To Secure Venture Capital For Your Business
Surfing the net while working again? Are you bored out of your mind at work? Chances are you are working for a boring company, wasting away the best years of your life and earning a wage that is slightly above poverty line. You’ve probably thought about setting up your own business with friends or have a great idea, but have no money to do anything about it.
Or perhaps, you face a bump in your quest to secure financing for your business. With no track record, it may seem too risky for the typical financial providers to consider giving them a loan. Such businesses may then need to consider alternative resources for its capital financing, such as relatives, friends, angel investors or venture capital.
Businesses with limited operating history, too small to raise capital in the public markets or not sufficiently mature to secure a bank loan will find venture capital funding an appealing option.
Venture capital means that someone is taking a risk by investing money in your business because they think that they can earn a reasonable return for the risk they are being asked to take. It is usually for fast-growing digital companies. Venture capitalists (VCs) usually consider the team, the market opportunity, the product, and then consider these questions: Will a lot of people buy this? Will the team survive? Is there a minimum viable product? If all these are considered and the outcome is positive, the start-up is likely to be successful.
Not only do VC provide them with financing, they also provide them with managerial and technical expertise. This can very well be an added advantage for the businesses as part of their learning and growing process.
How do you get hold of venture capital financing for your business? iMoney Group has gone through a few rounds of fund raising to where we are today. There are more facilities for new entrepreneurs today compared to two years ago, which makes it slightly easier to put their feet into the start-up world.
If you have an idea to monetise, here’s what I’ve learnt in securing venture capital as a start-up in Malaysia. As an entrepreneur seeking venture capital, you are selling your business idea and your ability to execute that idea. Securing the funding you need is a matter of taking specific steps, namely the following:
1. Assemble the perfect team
Given the high degree of uncertainty associated with early-stage investing, having the right team helps in attracting venture capital funding. Whether your team is made up of experienced professionals, or fresh 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. The team must have the necessary skills, domain expertise and diversity to evolve just as quickly as the industry does.
I believe this is the most important criterion that investors consider first because a strong team can turn an average idea into a great idea. A strong idea powered by a weak team may not be executed well and this is bad for business. The iMoney’s team is formed by choosing the people who had the relevant experience according to the nature of the business. Having a strong term enabled us to still come up with different ideas, or back-up plans, if one idea did not materialise as planned.
2. Your idea must be the best but not necessarily the first
In order for VCs to justify the large risk they are taking with your company, your business idea must be positioned as a solution to a problem. It’s not about being original in your ideas but about how you plan to execute it successful, when others could not. For example, Google is the most successful search engine today, but it was not the first search engine. The same goes for Facebook – it only existed after the likes of Friendster and My Space.
To make your idea stand out from the existing ones, you need to show you can and will do things differently, and the projected growth for the business.
The best way to pitch your business idea is by highlighting a problem that is statistically proven, and then explain how your business idea can solve this problem. Your business will then be a need – rather than a want. Needs go a long way in securing clients or customers as well as being beneficial to the majority of the consumers.
3. Build a strong case
Once you have identified the VCs that is in line with your business, you need to know what will grab their attention. Put yourself in the shoes of the VCs and highlight things that would move you into investing your money into a new business.
Once you have caught their attention, they will want to find out more about your business prospects. You need to show that your product or service has customers and potential growth, and that risk has been reduced. This will attract investors. Letting the VCs know that you need the money is not a good enough reason for them to invest.
Remember, it’s all about the traction at an early stage. Can you quadruple your business in growth or revenue in under a year? Twitter Inc., a tech Initial Public Offering (IPO) with no profit still garnered a lot of investors support. It is not always about profit.
It is important to support your pitch to the VCs with how you have executed your previous business ideas successfully, proving that it can generate revenue. For example, you can conduct a survey or research to get an idea about how the market at large would react to the service or product that your business offered.
4. Be clear about your financial needs
It is essential that the VC knows how much money is required and what target growth you will get to with the fund. You should also align those needs with timing goals and valuation expectations. Your financial needs should be clearly laid out on a year-by-year basis.
Your financial projections demonstrate that you understand the economics of your business. They should tell what drives your growth, what drives your revenue, and how your business will evolve over the next several years.
5. Find the right venture capitalists
Do your research on all the VCs and find out what they are looking for in terms of investment size, return on investment criteria, investment style, industry, and geographic preferences. Compare and see if they match your business before actually approaching them.
When I was looking for the right VC for iMoney, besides the monetary gain, I looked for those that would add value to the business, who can provide me with advice and guidance, as well as the industry contact I require to expand the business.
Based on experience, fulfilling the above five criteria will have VCs come knocking at your door, which is half the battle.
6. Gain access to venture capitalists
One of the biggest challenges entrepreneurs face when pursuing funding is gaining access to suitable VCs. It is crucial that you begin by networking with the right people. Most VCs are looking for new business ideas that have been endorsed by people they know and trust, such as successful entrepreneurs, lawyers and accountants who understand the funding business. Endorsement is a critical part of any venture capital relationship, and gaining the respect of well-connected professionals should be a major first step for any entrepreneur looking for capital.
7. Get endorsements
Investors value validation as it makes investing into the business less risky. Is there good evidence that your business can acquire your target customers? Do you have a business partner within the industry? Do you already have paying customers?
The more credibility and customer traction you have, the more likely investors are going to be interested. Venture capitalists will conduct extensive risk assessment and independently evaluate opportunities and risks.
For example, if you are setting a property listing web portal, you can consider getting endorsements from relevant authorities like Real Estate and Housing Developers’ Association Malaysia (REHDA). It will give your business more credibility.
You can also provide personal references that will vouch for you. Just like how you conducted your research on the VCs, they will conduct independent research on you by speaking with your contacts in the industry to determine their take on your market and potential.
It should be a win-win situation for both the VC and you. Therefore, you must do some extra research before going about further with the investment.
8. Find out more about your VCs
Even though the capital is coming from the VC, you are also taking a risk by letting him or her in on your new business. Hence, you must do you due diligence to find out as much as possible about your VC to avoid disputes and friction in the future.
Ask for references that relate to your market sector, and ask the references about the negotiation process, the experience with the VC, especially in the first few months, as well as the ongoing relationship.
It is also important to find out if your VC is sincerely passionate about your business as they will likely be actively directing your company.
In the same way they will reference-check you with others, you should do likewise. Some of the things you should consider are: Do they demonstrate long-term commitment to founders? Have they invested in successful ventures before? How did they react to tough times in ventures that did not go so well? Speak to founders in companies they have invested in. It’s a small world, so if people are not keen to give an investor a reference or pass you on to someone else, that’s a red flag.
9. Get a lawyer
Make sure you have an experienced lawyer to examine the legal documents before you seal the deal. You definitely need the right legal help to protect yourself. Make sure your lawyer has been through similar deals.
Looking for venture capital is not something to take lightly, and if you have a sound business plan, it shouldn’t be too difficult to get the capital that you deserve. There are various avenues where you can find venture capital financing for your business – various Government resources, Malaysian Venture Capital Management Berhad (MAVCAP), Malaysia Venture Capital & Private Equity Association (MVCA), Teak Capital, and many more.
When approaching VCs, you need to demonstrate the passion and dedication to your business. Hopefully, the investors will recognise your ability to build a company based on your plan and your proficiency and extend an offer. The investor is betting on you just as much as the business opportunity, so don’t sell yourself short when presenting your capabilities.
Most importantly, budding entrepreneurs must be ready at all times to pitch for their business. You never know when you might meet a potential investor – it could be in a conference, social party or even in a flight! Sometimes, you will have to be ready for an elevator pitch – pitching to a potential investor in the one to two minutes you get with them in the elevator before they reach their floor. Opportunities can present themselves at the unlikeliest time and places but if you live and breathe your business, you will eventually see your idea come into fruition.