You’re the founder of a promising startup and you’re looking for venture capital investors to take the next step in your business strategy. Usually you only get one chance to impress an investor, so it’s important to challenge yourself on the most important points of interest before you reach out. Did you prepare a compelling pitch? Are you sure you covered all the red flags that could make an investor turn down your pitch at first sight? Are you well prepared for more advanced conversations about financials? Is your data room due diligence ready?
Before we dive into being venture capital-ready, you might want to ask yourself if a venture capital (VC) fund is the right source of financing for your startup. If you’re not sure yet, you can read more about the different types of funding here.
If you’ve made up your mind and you're sure that VC funding is the way to go, read through this checklist to help you with the next step: ticking the right boxes before reaching out to investors.
A venture capital firm considers the management team as by far the most important factor for success or failure of their portfolio companies. That’s why a strong founding team is fundamental, and one of the most convincing arguments to get a VC interested. Venture capital investors look for a complementary team with experience, either in the field of expertise, or in entrepreneurship in general (ideally both!).
Don’t underestimate your passion either: founders who are passionate and show enough drive and experience to build a successful company have a better chance of attracting support. The broader the reach of your team's joint skillset, the better. Business, engineering and developing, sales and marketing - make sure to explain who is leading key success roles in your team. You can often tweak or fix your financial model, but it’s harder to fix the (founding) team you’ve assembled to build your startup together.
There are many great solutions to barely existing problems. Are you, as startup founders, addressing a problem important enough for your good idea to reach a substantial customer base and scale? Will you get enough traction to ensure big returns?
Most venture capitalists are looking for a return on investment within the next 5-10 years. Since they operate in a risky investment environment, scalability is a key investment consideration.
It’s one of the reasons why software-as-a-service is so popular with VCs. Locking in customers brings recurring and predictable revenue, and over time, when the software is ready, the business model has the potential to make each euro spent by the investor worth more than the one before it.
When approaching potential investors, you should have an in-depth understanding of your financials as part of your business plan. Did you prepare a financial model with different scenarios? What’s your burn rate (how are you spending money) and runway (how long will the new venture take to become profitable)? A solid financial plan will not only assure a VC firm that a potential investment will be profitable, but it will also demonstrate that the team they are investing in is not afraid to do some number crunching, spend their money wisely and keep track of a budget.
The financial model will show how much money you need and what you will do with that money. But how many shares are you willing to sell in order to get a venture capital fund on board? A valuation of the company will help you define how to split the shares. Valuing a startup isn’t easy, especially when there’s no (or very limited) previous financial results to look at.
Our team conducts valuations for startups looking to get venture capital funding. Reach out to us to discover what valuation method works best for your startup.
It’s important to remember that valuation is only one part of the agreement. You can still make a bad deal, even if the valuation is exactly the amount of money that you had initially hoped for. Rights and preferences, as well as governance, will strongly impact your ability to succeed in a second round of fundraising. One example is how different parties are compensated when an exit takes place.
This is strongly related to the first item on our checklist. A clear and legally binding shareholders’ agreement between the founders will be warmly welcomed by external investors. Before you start inviting VCs into your current structure and cap table, you might want to set things straight with the initial founders: what are your (voting) rights, who is responsible for which aspect of the business, what happens if one of the founders and board members wants to exit the company or can’t perform because of illness? What’s your exit strategy? Creating a business is just like a marriage: You should set up a legally binding agreement and all legal documents necessary to avoid misunderstandings and unnecessary discussions in the future.
Besides these five checks, there are a few more elements your potential investor will evaluate while looking into your startup. Need help identifying the red flags? With PwC’s VC Gap Analysis, we can look at your investment case through the lens of a venture capitalist. We work with VC investors on a regular basis and we understand what they are looking for. The VC Gap Analysis helps us identify the gaps that need to be addressed and recommend the best ways to tackle them.
Elise Carton