This article is part of Tools of the Trade, a weekly series in which a variety of experts share actionable tips for achieving fast and effective results on everything from productivity to fundraising.
This week, Bob Ackerman explains how entrepreneurs can impress venture capitalists. Ackerman is the founder and managing director of Allegis, an early-stage venture firm that focuses on cybertechnology companies.
Pulling off a successful pitch and actually getting an investment from a venture capital firm is a huge feat. While the pace of venture capital investing remains strong — the second quarter of 2016 marked the 10th consecutive quarter in which VCs invested more than $10 billion — as an entrepreneur, the odds are stacked against you. VCs typically finance only one or two percent of the business plans they see.
Before you begin perfecting your pitch and approaching VC firms, take a moment to determine whether venture capital is the right funding option. VCs typically deploy millions of dollars in a startup and are looking to make several times their investment: 6X to 10X is a good rule of thumb. If your startup doesn't truly target a huge market with a strong and credible management team, you should consider other sources of funding.
If you decide VC funding is for you, be strategic about the process. Start by doing your homework — target venture firms that are likely to be interested in your startup, based on their existing portfolio. Not every venture firm is right for every entrepreneur.
With that in mind, here are nine steps to get you started and improve your odds for getting a VC to bite.
1. Ask yourself the serious questions. Does the market you're addressing really warrant attention from a VC? Startups always face lots of barriers to entry; is your product or service differentiated enough to overcome these obstacles? If you do raise venture funds, you will likely have to surrender control of your company to your new boss - i.e., your Board, which will now include VCs. Are you comfortable with that? If not, venture capital funding may not be the best route.
2. Make the intangible, tangible. Do as much as you can before showing up to a pitch: incorporate your company, set up your website and domain name, create business cards and, if possible, create a product prototype. This puts you in a better position to raise capital at a higher valuation, particularly if you have a prototype, than if you simply come with an idea.
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3. Read their minds. There are certain pieces of information VCs will always want to know. Be ready to address the three types of risk all startups face: market, product and execution. They'll also want to see customer references. Finally, make sure you can address the technical credibility of your product or service.