How to attract Venture Capital funds to scale your startup
Innovative entrepreneurs drive the global economy. Without the quality injection of venture capital (VC), there is very little the entrepreneurs can achieve. The conception of brilliant market solutions isn’t financial-intensive but capital injection becomes unavoidably critical to the realization of the market potential of a product right from the production expansion stage to the scaled channel penetration and communication stages.
Venture capitalists provide funding for startups to scale their businesses. According to imarc, a market research firm, global venture capital investment reached $197.7 trillion in the year 2020. For Africa startups, AfricArena, a tech ecosystem accelerator foresees a healthy inflow of venture capital throughout the year 2021. The firm pegged the expected total VC inflow into startups on the continent at a maximum of $2.8 billion. This is an impressive capital injection projection considering VC funds channelled into the continent in 2015 were a mere $277 million.
Harvard Business Review put the relevance of VC to entrepreneurial drive succinctly: “Where venture money plays an important role is in the next stage of the innovation life cycle—the period in a company’s life when it begins to commercialize its innovation. We estimate that more than 80% of the money invested by venture capitalists goes into building the infrastructure required to grow the business—in expense investments (manufacturing, marketing, and sales) and the balance sheet (providing fixed assets and working capital)”.
Broadly, sectors such as Pharma and Biotech, Software, Media and Entertainment, Medical Devices and Equipment, Medical Services and Systems, IT Hardware, IT services and Telecommunication, Consumer Goods, Recreation, Energy and Financial technology are attracting venture capitals on a massive scale.
Precisely, venture capitals are key to transforming innovative business ideas into actual products that serve a market satisfactorily. Therefore, obtaining the goodwill of small to big size venture capital firms requires a strategic approach.
Venture capital investors are deep analytical thinkers. Analytical thinkers see beyond data. They ferret data set to extract key information that tends towards some ‘yummy fat rewards’ in any prospective market. It would take more than having a good product idea or putting together brilliant presentation slides to attract venture capital funds.
Here are two key attributes you must demonstrate for VC firms to invest in your startups:
- Demonstrate that there is a large market for your product – VC firms prioritize market size and market value analyses. Allan Willie, the Co-founder of Kipfolio, a Canadian Software company, advised, “VCs will want to know about the market for the product or service you’re selling. More than that, they will want to know that it’s a big market”. Venture capitalists want to be sure the market can accommodate your growth aspiration or target. Of course, if the size is large enough and a deeper market penetration could be achieved through wider communication, distribution and product renewal efforts, VC firms would gladly put money into your business account.
- Avoid asking for all your funding upfront – VC firms appreciate a phased approach to investing in any startup. The investors want to be sure their funds would be well managed, articulated incrementally and measured consistently based on certain metrics. Kay Akinwunmi, the founder of Zazuu, a price comparison website used by Africans in the diaspora, learned this the hard way. Kay found out that he wasn’t getting the VC funds he had been pitching for because he was asking for the fund in a lump sum. He told the BBC, “When we started, we were asking for £500,000. We got all sorts of rejections. People said we were too early, or we’re raising too much. People who had initially said they were interested stopped returning our calls. And then we realised we had to do something different.”
Here is the genius approach Kay later adopted to get a ‘Yes’ to his investment pitch: “As opposed to raising the full £500,000 and saying here’s what we can do in 12 months – we said if we raised £150,000 today, we could build the end-to-end money transfer proposition. If we raised £150,000 more we could get 100,000 customers. And if we raised £150,000 more, we could get 100,000 customers”.
Investors expect startup founders to be literate, have acquired some level of exposure in their business segment, carried out market research, compile an experienced team, and put together a brilliant presentation/ business plan, but more than those features, VC firms want startups to demonstrate the two key attributes listed above. Have a big win.