As an angel investor with experience in the venture capital space, I would like to share how entrepreneurs should approach venture capitalists. For entrepreneurs seeking funding for their startups, understanding the mindset of a venture capitalist (VC) can be crucial to securing investment. While it can be challenging to predict what a VC will invest in, some key factors can help entrepreneurs better understand how VCs think and evaluate investment opportunities.
Having an impressive resume, such as an MBA from a prestigious institution, may not guarantee an entrepreneur an investment from a VC. While this is true, it is important to note that a solid educational background and relevant experience are still highly valued by VCs. These credentials can help establish credibility and expertise in a particular field, which can give an entrepreneur an advantage when pitching their business idea.
However, it is also important to note that education and experience are not the only criteria that VCs consider when evaluating investment opportunities. The strength of the business idea and the growth potential is paramount. A great idea can come from anywhere, and VCs are always on the lookout for innovative and disruptive ideas that have the potential to become successful companies.
VCs may exhibit strategic laziness when it comes to making investments. While there may be some truth to this in some cases, it is not a universal truth. VCs are highly motivated to make successful investments as it is how they earn returns for their investors. They are constantly seeking out new opportunities, conducting due diligence, and working with entrepreneurs to help them grow their businesses.
Entrepreneurs should focus on developing a relationship with a VC before pitching their business idea. While it is true that building a relationship with a VC can be helpful, it is not always necessary. Many VCs are open to hearing from entrepreneurs they have never met before, as long as they have a compelling business idea and a solid execution plan.
It is important to note that not all VCs operate in the same way. Different VCs have different investment criteria, strategies, and areas of focus. Entrepreneurs need to do their research and target VCs that are a good fit for their business idea.
Be Strategic
When VCs establish their funds, they develop a strategy. If your ideas do not align with their strategy, they are unlikely to be interested in investing, regardless of how great they may seem. They may engage with you to explore whether there is a way to integrate your idea into their overall plans. However, they may ultimately reject your idea after several iterations, leaving you feeling as though your time has been wasted. But it’s possible that your idea was not the right fit for them, not the other way around. If a VC is not interested in your proposal, they will not waste their time going back and forth or seeking additional information.
The first lesson to learn is to ensure that there is a strategic fit between you and the VC you are approaching. If you are seeking a large sum of money from a VC fund that is not suited to your business, you will be wasting your time. For instance, if you are a tech entrepreneur seeking funds from a VC fund focused on finance, you are also unlikely to get far. It’s crucial to research the VC thoroughly before approaching them for funding. Even if the VC approaches you, make sure your goals and values are aligned before moving forward with them.
Have a Solid Business Plan
Entrepreneurs often approach VCs without a clear plan in place for their business. However, VCs need to know everything about your plan, from start to finish. They want to know how much of your business you’re willing to sell, your exit strategies, the risks your business faces, and how you plan to mitigate them. VCs are often funded by other investors and creditors, which means they have limited time and resources. As an entrepreneur, it’s your responsibility to help them help you by developing a solid plan and strategy.
Lesson number two: If you can’t explain how demographic changes might affect your business, you’re unlikely to get funding from a VC, even if you’re woken up from a deep slumber. VCs don’t want to hear vague stories; they want concrete plans backed up by data and analysis. It’s your job as an entrepreneur to know your business inside and out and be prepared to answer tough questions from potential investors. Only then can you hope to secure the funding you need to grow and succeed.
Be in Love with your Idea
If your only reason for starting a business is to attract a VC fund and cash out, most VCs will be able to tell. They won’t be interested in working with someone who is solely motivated by money and will likely reject your proposal. On the other hand, when you have a genuine passion for your business idea, it shows. Even if you have a potentially lucrative idea, if the passion isn’t there, most VCs will not be interested in investing. It’s important to be true to yourself and not try to copy successful businesses like Uber and present them as your ideas. A reputable VC will not take you seriously if you lack authenticity.
Lesson number three: Be authentic. Don’t try to be someone you’re not or present ideas that aren’t your own. Focus on your passions and let your enthusiasm shine through in your business. When you are true to yourself, you’ll attract investors who share your vision and are more likely to help you achieve your goals.
Life is not always fair
It is important to recognize that even if you do everything right and meet all the criteria, there is no guarantee that you will succeed in securing funding from a venture capitalist (VC). VCs tend to be cautious and may err on the side of avoiding undue risk, which can lead to them rejecting perfectly viable startups. This is because they are human and not necessarily because they are strategically lazy.
Lesson number four is that statistically, it may be easier to get into Harvard Business School than to secure funding from a VC. This is because VCs are often looking for startups with the potential for significant growth and fast returns, with a focus on reaching a $100 million valuation.
However, it is worth noting that not all VCs are solely focused on achieving maximum financial returns. Some VCs prioritize social impact and may be willing to invest in social enterprises that are unlikely to generate the same high returns as other startups. These VCs may not be looking for 20-50x returns, and a 2x return may be satisfactory for them. Ultimately, the VC landscape is diverse, and there are different types of VCs with varying priorities and investment strategies.
In conclusion, securing funding from venture capitalists can be a challenging and competitive process. While it is important to have a good understanding of what VCs are looking for in a startup, it is equally important to focus on growing your business and achieving the metrics that matter most. Rather than solely focusing on securing funding, entrepreneurs should prioritize building a strong and successful business that is attractive to potential investors. Ultimately, by focusing on building a successful business and becoming a highly sought-after “bride,” entrepreneurs can increase their chances of securing funding from VCs and achieving long-term success.
This article was written by Manasseh Egedegbe, Founder and Chief Investment Officer at Kudy Financials S.à.r.l.
