For early-stage founders looking to grow their businesses, seeking venture capital can be a great decision. And while this means of venture fundraising isn't ideal for every business, it is certainly an option for entrepreneurs to consider when they want to grow a business and need more capital to fund the losses. By having a better understanding of the current venture capital landscape, as well as some tips for seeking and obtaining venture money, founders can make the right decisions for their businesses.To help give founders a leg up, we sat down with Mike Rogers, Partner at Interplay Ventures, to get his insights and advice on the current venture capital landscape.
Advice to Founders Seeking VC Investing
For startup founders who have made the decision to seek out high-risk venture capital, there are some important steps to take before you approach a venture capitalist if you want to be taken seriously and have the best chances for success.
1. A Market Size Big Enough to Interest Venture Capitalists
In doing your market research, be aware of your competition and overall market size. You might be surprised at the minimum applicable market a venture capitalist will require in order to be seen as a good investment. Investors tend to stick to products or services in spaces that have a significant runway, and whose multiples can achieve the type of home run gains that drive a portfolio’s return for Limited Partners (LPs) in their fund.
2. Have a Detailed Plan for Scaling
One of the next key questions a venture capitalist will likely ask regarding your early-stage company is exactly what your plan is for scaling and how you plan to take things to the next level. It's not enough to know that you need to expand your market reach or that you need capital to increase your production. You should prepare for a meeting with a VC as though you already have the funding you need; have a plan in place and know exactly how that money will be used and what stages of scaling you anticipate.
3. Know Your Customer Acquisition Costs
Start by doing your homework on customer acquisition costs (CAC). This is one of the first things a venture capitalist VC will likely ask you about, and you don't want to be unprepared. Specific customer acquisition costs can vary quite a lot by industry, and a venture capitalist VC will want to know that you're performing at market standards for your own industry at the very least. You will want to know the latest comparables, as data even a year ago could be outdated. If you’re not hitting those metrics, ensure you are optimizing acquisition spend as much as possible or find. For many companies, Google and other online ads may still be the most cost-effective means of acquiring new customers, but you should never assume this to be true of your business without doing your market research.
4. Research Lifetime Customer Values
An important aspect of seeking venture capital is knowing your lifetime customer values (LTV), as this contribution margin metric is an important contrast to compare against the cost of acquiring a customer (see above). While like your CAC this can require extensive research on your part, a venture capitalist will need to know that you've crunched the numbers here. This information will be important in determining whether the investment is worth the risk to a venture capitalist. Simply put, they want to know that you can acquire a new customer at a cost in which the amount they pay you over time provides a sufficient enough margin to run the business and return profits at scale.
5. Resourcefulness is Sexy
Today's venture capitalists like to see businesses that are grass-roots and truly building from the ground up. Big startups that pump money into "fancy" office amenities are generally seen as a red flag that may signify wastefulness, whereas an entrepreneur who is literally sleeping on a friend's futon and foregoing a large salary to re-invest in the business speaks volumes in today's VC landscape.
6. Funding Later in the Game
Be sure to consider the trend that companies are now receiving Venture Capital funding later in the game than they were even just a year or two ago. After the market adjusted following an imbalance between early stage and late stage funding, venture capitalists began tending toward a preference for businesses that have already proven themselves successful at the early stages. Examples of this include finding a product market fit as well as showing at least some early positive CPC to LTV metrics.
7. Is Venture Capital your best path?
Finally, remember that seeking venture capital investments isn't the hands-down best choice for all companies looking to scale. Shows like Shark Tank tend to glamorize the entire process and make it seem like getting a venture capital deal is the be-all-end-all of a successful company. In reality, there are situations where venture money will not be in a company's best interest and re-investing profits, for example, will be the better choice. Know what's best for your business so you don't waste your time (or that of a venture capitalist).These are just a few insights about today's trends in venture capital fundraising that may be useful to you as the founder of an early stage company. Be sure to keep these insights in mind as you prepare to seek investment from a VC or determine whether or not this is the right choice for your company.