Tim Backes — March 12, 2020 A flourishing business requires huge amounts of dedication, no matter its size. In fact, a number of entrepreneurs will agree that dealing with growth often requires more effort and energy than getting things started in the first place. Which is, in fact, quite logical.
Starting a business does necessitate a great idea, along with research and planning, as well as setting up everything so that you and your team can get started. It’s also an exciting time in an entrepreneur’s life, with a seemingly endless source of inspiration, and the promise of a potentially bright future. But then, along the way, there are those inevitable bumps in the road, sleepless nights, months or years of hard work, and for some, this means realizing that moving forward means bringing in help.
That’s where venture capital comes in. This form of financing is perfect for businesses looking to gain some help (and not just in terms of money) while in the growing stage, in exchange for equity or an ownership stake. Some of the biggest names in pharmaceuticals and tech (including GoPro, Oculus, and WhatsApp), have, at some point, turned towards venture capital.
How do You Know What Type of Venture Capital is Right for You?
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The thing about this type of financing is that there isn’t a single formula that can be applied to any business. The process of finding the right investors can be lengthy and require huge amounts of work in itself before even starting any type of negotiation. That’s why it’s very important to approach it strategically and objectively, so as to find a solution you’ll be satisfied with in five, ten, or twenty years’ time.
To identify the best type of venture capital for yourself, it’s best to first decide on what you want. If you’re unsure, you can even start with what you don’t want. Are you OK with giving up a portion of control over the direction in which your business grows? You need to be aware of the fact that a hands-on approach by a partner could lead your business in a direction that differs from your original vision. Secondly, are you ready to follow someone else’s advice, instincts, or industry-specific know-how?
These are important considerations to make, as they’ll tell you what you should be looking for and what you should be staying away from. Be aware of the fact that what you’re building with potential partners is going to be a long-term relationship, so don’t make your decision in a flash. You know what they say: fools rush in.
Know Where You Stand
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First off, you’ll want to get a good understanding of the stage your business is in. As this factor will determine the type of investment you can expect to secure, it will help you choose the right partner, as well as to prepare a business plan that plays to your strengths and sets optimistic expectations.
Seed stage
This is the earliest stage of a business. If all you’ve got is an idea, you’ll probably be looking for an investor who can help you set it into motion. Seed stage investments are usually small and cover initial costs, such as market research and product development. If you’re just beginning, you’ll probably turn towards friends and family, or might try to find an angel investor willing to provide up to around $ 500k in funding.
Start-up stage
If you’ve already done your research and development, have a prototype you can show, and have a business plan ready, you’ll be looking for investors who can help you get things rolling. This includes reaching potential customers, as well as making any adjustments to your products or services.
First round
Launching and selling a product requires a lot of funds, which is usually when business owners will start to look for venture capital funding.
Expansion stage
A growing business needs to balance its profits with an increase in demand (that automatically generates high costs), which is why this stage often necessitates outside help. To avoid a cash flow crisis, but also to diversify its offer and expand its reach, a company may look into venture capital as a resource to do just so.
The amount of money needed at this stage can amount up to ten or even twenty million dollars.
Mezzanine
Finally, once a business has become established enough, it may go international, or go ahead with a merger, acquisition, etc. Mezzanine financing helps it achieve these goals.
Tips for Choosing an Investor
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When looking for financing, it’s very important that you find a fit that will work for you and your business. In order to achieve this, you’ll need to take the time to prepare thoroughly. If you’re considering venture capital, or are already in the process, these are the tips you should be following to ensure the highest chances of successful cooperation.
Know what you want from the future
Although you’ve already taken a look at where your business stands, it’s also quite important that you’re aware of your vision. What are your growth rates? How far are you willing to expand? Where do you see yourself in the long run?
Most venture capital investors are looking for unicorn companies, with exponential growth, capable of bringing in a 10x return. Are you such a company? If you’re more interested in finding long-term partners who will help you achieve stable and steady results, you might just not be looking for VC in the first place.
Do your research
A lot of people make the same mistake when looking for financing, in that they go for the biggest VC firm they can get. Of course, that’s great. You want someone on your side that has the experience and funds to get you to your end goal. But more important than the company name is the partner you’ll be working with. A great fit from a smaller firm will probably work out better than a mediocre one from a top tier organization.
Look for more than money
Finally, you should look for more than just funding with VC financing. You’ll want to bring in people who will believe in your project as much as you do and who will share your enthusiasm. Look for someone with the same vision as the one you have, whose goals align with your own, whose work values are similar, and whose style of operation compliments your own. This way, your process won’t be disrupted, but you’ll still get the benefits of a trusted partner whom you can rely on.
Final Thoughts
Bringing someone new in on a project you’re passionate about can be a scary and stressful process. It forces you to consider scenarios that you might not have to entertain if you were going on the entrepreneurial journey on your own. Moreover, VC makes it imperative that you have a solid exit strategy right from the early stages of your business endeavors.
But, it also offers huge benefits in allowing you to reach your full potential in a short period of time, and, in an ideal situation, allowing you to find success early on. It’s something a lot of start-ups are looking for, but in order to ensure the highest success rate possible, do your homework beforehand. That way, you can make decisions that are informed and in your best interest.
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