“Every now and again someone will email us with their new idea. Unfortunately, that’s just not the way we work.” Frank Maene, managing partner of venture capital fund Volta, is not trying to deter new start-ups. He just wants to get the message across to them that money doesn’t grow on trees. Getting financial backing is hard work. “You need to start by developing your idea. Talk to as many people as you can. Talk to your mother, talk to your partner. If you can’t explain your idea to them, you won’t be able to explain it to anyone, including me. Make sure you’ve got all your facts straight.”
But it’s not enough just to have a good idea. Maene, whose career began in the software industry and included a long stint in Silicon Valley, has these tips for you:
1. Look Before You Leap
It might not occur to you, but when investors get shares in your start-up they expect to be involved, often by means of a seat on the board of directors. Is this something you can live with? Investors also expect to see businesses growing quickly. Growing too rapidly can cause problems for businesses. Are you prepared to take that risk? As your business grows, there may be new financing terms, and you may get new shareholders. At the end of the day, you may only be a ten to twenty percent shareholder, in other words you may end up as a small shareholder in a big business. But would you prefer to hold a large share of a smaller business?
On average, it takes a new start-up nine months to arrange sufficient funding.
2. Factor in Time
On average, it takes a new start-up nine months to arrange sufficient funding. Around a quarter of this time will be spent trying to get money. If you don’t like the sound of that, then a start-up is not for you.
Be realistic. Your chance of success with a venture capitalist is probably around one to two percent. At Volta Ventures we have had hundreds of applications in the past four months. We have invested in a grand total of two.
3. Look for Alternatives
You don’t have to go straight to venture capitalists. Investigate the alternatives. You can try to get by for a while on a shoestring. Or you can ask around amongst friends and family. But of course this can have disadvantages; if you borrow money from Aunt Mary and it all goes wrong, there might not be a very festive atmosphere next Christmas…
Choose a business angel who understands your sector.
Another option is business angels. But take care – this type of funding, more than any other, varies enormously in quality. Many of them are top players in the world of business, but there are also plenty of amateurs. Choose a business angel who understands your sector. Make sure you click with them on a personal level, and ask them for advice and coaching. It’s no use having a business angel who is off sailing around the world.
There are many other sources of help. An incubator will offer you free office space, free advice and sometimes some funding. Crowdfunding can offer this too, though this is more suited to products – perhaps an innovative glasses case, for example. But if you want to, say, get a new software package onto the market, crowdfunding is less appropriate. Don’t forget to investigate possible tax breaks and subsidies. For example, if you have created some innovative technology, you have a 70 to 80 percent chance of eligibility for an IWT (Government Office for Innovation by Science and Technology) tax grant.
The best alternative is still to find ways to bring in revenue. For example, while you are building up your business, you can earn money as a consultant, or perhaps by getting a pre-product onto the market.
4. If You Need the Money, Do the Work
Every start-up thinks that their invention is the best in the world. In reality, their invention is just one of hundreds of thousands. Most investors get hundreds of proposals each year. Make sure yours is at the top of the pile. That’s your job, not mine.
You need to approach it in a professional way. Write a brief, persuasive, grammatically correct email, with a short business plan attached. If you write a 40-page long thesis, nobody will read it.
Your job is to convince us to stay by your side.
Send your mail to around 30 recipients. Make sure you follow up your emails with each potential investor. Can you wangle a meeting with the investor? Will there be a follow-up meeting? Once you have reached this stage, you can expect the investor to want to carry out an audit of your business. You should be prepared for this. The investor will want to check your bookkeeping, talk to your customers, and look closely at other aspects of your business. And so it goes on, step by step. Your job is to convince us to stay by your side.
5. Do You Just Need Money, or Do You Want Money With Added Value?
Do you just want money? Or do you want advice too? Are you looking for new partners, or new customers? I strongly believe that venture capitalists offer the most in terms of added value. I have 15 years of experience of working at grass roots level with start-ups, and 15 years of indirect experience through venture capital. Thanks to this experience, along with our extensive network, we can help start-ups to get onto the international market, to get more investment, and to hire more people.
Are you looking for new partners, or new customers?
6. A Potential Investor is Not a Potential Client
A classic mistake which many start-ups make is to confuse the investor with the customer, and to give them both the same pitch. Your investor doesn’t know the market; it’s your job to educate them. Your customer, on the other hand, does know the market, since they are the market. In other words, you will have to prepare two different PowerPoint presentations.
7. Make a Plan (It Doesn’t Have to be Perfect)
As well as having fabulous founders, having a good plan is also essential for your start-up. What is your market? Where is the gap in the market, and how big is that gap? What price will you be charging for your product? Why are you different, greater, faster and better value than your competitors? You need to be able to give examples. In a year’s time, all the flaws in your original plan will be clear to see, but that’s not the point. If you approach an investor, you need to have thought through all the details. You will need more than just the will to succeed.
Source: Trends (by Jozef Vangelder, 4/06/2015)