The expanding market has motivated a number of people to expand their business and many others to start new businesses of their own. Securing venture capital for a startup business does not only include raising capital but it is also the moment when you decide the future of your business. Here are 9 tricks to secure venture capital for your startup business and techniques to take the best decisions for the future of your business.
1. Entrepreneurship or Big Business
The infrastructure of a small business is entirely different from that of a big business. Before looking for venture capital, you need to make sure where ‘you’ want to see your business. Through the goals you set for yourself, the investor will evaluate your understanding of enterprise infrastructure.
Remember that you will have to choose one from entrepreneurship and big business. If you are willing to expand your business and make it big, you should also realize that you will not be the entrepreneur or sole owner. There will be shareholders and competitors to replace your chairmanship by passing through a transparent system of performance evaluation and promotions. You will have to give up on entrepreneurship for big business.
2. Make the Most of First Round
For securing venture capitalism, you will meet the investors a number of times. The deal will proceed step by step in every round of meetings but the first round is the most important one of all. The investors are most interesting and most evaluating in the first round. They will read between the lines of your terms and conditions and proceed on the basis of a few terms.
Some terms will also get rejected. Simply put, the first round decides the fate of your deal. Therefore, you need to be very cautious, most ambitious, and highly convincing in the first round.
3. Do the Math Later
The venture capitalists fund in startup businesses, which gives them the ultimate advantage of being more experienced in business investing than entrepreneurs. In general, a startup company needs 2-4 venture capital financings before becoming independent. As a beginner entrepreneur, you might become obsessed with settling the valuation of money in the first round. Although it is an important element, but something more important than that is to win a venture capital deal according to your terms and conditions. You can do the math later and convince the capitalists to invest ‘a little more’ in your startup business.
4. Know the Terminologies
This is a trick to deal with venture capitalists. They assess your experience and capabilities of understanding the business by using new and complicated terms in meetings. If you don’t know the terminologies, you may not get exactly what you want. Here are some important terms.
Pre-money Valuation: Pre-money valuation is evaluating the worth of your company in contrast with the money being invested in your company. The capitalists may also refer to this term as just ‘pre’ or ‘the pre’.
Post-money: It is the sum of pre-money and the invested money or capital. For example, a company raised $4 million venture capital at pre-money valuation of $6 million. The post money will be $10 million.
Option pool: Your startup company may or may not have a complete management team. Some venture capitalists prefer investing in companies where managerial and technical seats are still vacant. People who will be recruited on these seats will receive stock options. When these stock options are issued to these hires, some of the investors are diluted. To prevent dilution, the venture capitalists may require you to create option pools with unallocated stocks. For example, at $4 million venture capital at $6 million pre-valuation, the investor may ask to create option pool of 20% unallocated stocks. In other words, 20% stock ownership of current management team has been allocated to new recruitments.
5. Raise More Money than What You Need
No matter how much venture capital you raise, you will desire for ‘a little more’. Raising more capital than what you need is also effective in a way that it helps you in bad times and covering the unexpected costs. You can also secure that money to create option pool for new hires or simply use it to expand your business if the basic money was sufficient to make your business independent.
6. Know the Terms to Get Away With
No matter how much you prepare yourself, the venture capitalist will try to find things to get away with. Despite knowing the market vocabulary, you may encounter some uncommon or rare terms. You can escape the terms you don’t understand by statements like ‘it works in any market’ and ‘it demonstrates my savviness.’
7. Prepare with the Team
This tip is specifically for first-time entrepreneurs. If you have never tried your luck on startup business, the tip is to prepare before meeting with your team. There are two benefits of this. Firstly, the venture capitalist knows that the business has already laid foundations and is ready to start operating and producing returns. Secondly, you will get hands on technical and managerial knowledge which will be helpful in negotiating with the investor.
8. Play it Like a Game
Many entrepreneurs don’t find their business interesting. Business doesn’t necessarily need to be boring. It is like a game with victories and failures. Throughout your business voyage, you will realize that failure and victory go hand in hand with each other and even highly successful multinational companies face big failures after years of success. Take the investment very seriously but play it like a game. Both over-ambitiousness and lack of interest can lead to failed meetings.
9. Do Your Homework on Choosing Partner
You are going to have a lifetime relationship with your venture capitalist. Switching capital partner actually requires a lot of effort and complicated business relationships. In the end, you may find a loss you suffered ten years ago when you were switching your capital partner. Therefore, be very careful about choosing the investor. Do your homework, research the market and choose a professional partner.
During the process of raising venture capital, you will experience various steps to escape smartly. But these 9 tricks will help you get through most of the woods smartly.