Which came first—the venture capitalist or the company? This question is a lot easier to solve than the ages-old debate over the chicken and the egg. Yet lately entrepreneurs have forgotten the answer, tying the two together as inseparable organisms. Companies have been around since the dawn of civilization, when you could make a living off a corner store even without expanding. Venture capitalism, on the other hand, only began in the mid-twentieth century. So why are founders so eager to jump into the VC pool?
As shown in last week’s infographic, it is part of the formula for a big (in VC terms, “successful”) company. But the definition of successful shifts when in a venture capitalist’s mind. To them, companies with the starting potential for $50+ million yearly revenue are often the ones worth investing in. They’ll be less interested in a company that makes it to $8 million after five years, even though (at least where I’m from) $8 million is a pretty solid number.
If it’s not clear by that valuation, most companies never make it to the venture capital stage. But this does not equate to failure. Going through more angel rounds, like we discussed before, can fund a company well. Moreover, if the founders decide to sell the company after a few years, their percentage ownership will be much larger (they also won’t have to worry about their actions being vetoed, as some venture capitalists have been known to do). There’s more freedom for businesses that don’t have venture capital in the long run—without the addition of million-dollar investments there’s less pressure on them to multiply the money to extremes. As the saying goes, more money creates more problems, and if you don’t see yourself running a huge-scale company, it might be best to steer clear of venture capitalists. When VCs have their money in your business, they have a loud voice when it comes to your actions, and will guide you to make as big a profit as possible. Though this is the goal of most companies the pressure to escalate quickly might shift the overall focus of the company and (at best) lose its soul.
Beyond that, the task of raising venture capital is a difficult one. Having it as an incentive during your company’s start-up phase can be challenging, and it can create the wrong environment for you and your employees. Those who shoot for venture capital early lose precious time they should be spending improving their company—even if they do expect it to be huge, they should wait until they stabilize before beginning their search.
For example, say you’ve had it in your mind that you’re going to create the next worldwide form of social media, or any “huge” company for that matter, from the very inception. You’ve gone through a few angel rounds and used their money minimally and wisely. It’s been a year or so, and you realize that you might have something real here. You might be poised to make that big business—everything has lined up perfectly. Well then, congratulations. It’s time to meet some venture capitalists!
If meeting and connecting with venture capitalists seems overwhelming, that’s because it is. It’s taking the step from college ball to the major leagues and suddenly millions of dollars are in play. Finding those first few contacts isn’t always going to happen organically (though often if you’ve gained some PR on your journey you’ll get an offer or two). You’ll have to go to presentations and conferences. You’ll need to seek out local VCs and find some way to contact them. Read all the venture capital blogs out there and message their writers—maybe they’ll be impressed with your idea and want to invest. Ask fellow entrepreneurs how they got their funding. Research programs like YCombinator that bring venture capitalists to you and see if you’re eligible to apply.
No matter what approach you take, however, perfect your pitch. Because VCs often meet with hundreds of new companies every year, you need to stand out. However, because their job is a time-consuming one, you need to be able to stand out without taking up more than two minutes of their time. This is what your pitch should do. Whether it comes to meeting venture capitalists at a conference, an airport lounge, a party, or just through that first email, you should have some sentences prepared that will make them jump to invest (honest sentences, though that should go without saying).
Luckily, there is a formula for these first pitches. In the first, quick contact, define:
- the market
- the problem it is facing
- your solution to the problem
- what progress you’ve made so far
- why your company is unique
This is all they need to know at first, and you don’t need to dive into it in depth. At this point in the game you probably have the first four parts worked out, but the latter can be more difficult to define. It isn’t just what makes your company different from those on the market—it might be what makes you or your team different as well. If you’re looking for inspiration on what your company’s defining quality can be, look to our previous list of qualities that increase the valuation of a company. Often those can be the perfect answer.
If your connections are made and your pitches land well, there are two things you should keep in mind. The first is to never lose track of the company itself. When you’re talking to venture capitalists, you’re blowing up the company’s qualifications and achievements to make it seem flawless. But never forget that there are parts of it that need work, that need the attention of their founder. The second thing you should remember is to always follow up. If a VC gives you their contact information, contact them. You’d be surprised at how many people do well in their pitches only to leave that as their last interaction with the investor. Do not miss out on the opportunity to make a second impression.
That second impression might lead to an offer. If your company is as good as you’d dreamed it to be you’ll likely get many offers. This is just the beginning. Dealing with venture capitalists, people who invest for a living, takes a vast knowledge of the industry and the legalities that come with it. We hope to give you an introductory lesson on that in our next post, “Term Sheets and Timing”.