7 Things to Fix In Your Business Before Approaching a Venture Capitalist

Should you approach a venture capitalist to fund your next brilliant idea? Maybe. Venture capital funding is not necessarily for every kind of business, but it may be right for yours.

Should you approach a venture capitalist?

VCs look for companies that promise a blistering pace of growth and a solid and large (from 300 to 1000%) return on investment within a span of three to seven years. With those kinds of numbers as the target, it’s clear that not every startup is going to make the cut. It’s only companies that operate in extremely high-growth industries and that have a solid business setup that can even hope to come close to those numbers.

Another thing to keep in mind is the timing of approaching a VC. Most VCs prefer to partner with companies that have a clear product in place, a go-to-market strategy, and better still, actual sales under their belt.

If you are just starting out, you might want to bootstrap your initial period with your own funds or loans from family and friends. Crowdfunding, startup incubators, or even government grants are great options for startups as seed capital. Most companies don’t make the VC cut in terms of future growth and are better off approaching angel investors, getting bank credit, or even bringing in a strategic investor to pump in much-needed funds into the business.

Businesses that do make the cut for VC funding, should ideally roll out their businesses and see some traction, and then approach a VC who might be tempted to jump in. Remember, these are investors out to make a profit with as little risk as possible. Offer them a growth story with the first few chapters already penned, and you have a higher chance of them biting the proverbial bullet.

So now that you know if you should approach a venture capitalist, and the best timing for approaching a VC, here's how to take care of the basics of your business before making that first contact.

How to ready your business before approaching a venture capitalist

1. Show some sales

As described at length above, your chances of getting a VC on board rise exponentially when your business actually has started showing some top-line numbers. It is not necessary to be profitable before you approach a VC, (though that would be a big help). It’s a good idea to wait until you’ve seen for yourself that this is a viable business idea that is capable of bringing in real money.

2. Have good working technology and vendor partnerships

Do you have proprietary technology that works like a dream that your business uses? Great! Do you have vendors in place for you to produce your final product? Super! These are often stumbling blocks for new businesses. Technology hiccups in new startups are a common feature.

Sourcing the right raw materials at the best price and building a good working relationship with vendors is another aspect that many entrepreneurs overlook. Fix these before you approach your VC.

3. Assemble the right team

A good VC will always look at the type of people that make up your business. The right skills matter almost as much as the right attitude, and your team should have a combination of both before a VC takes a magnifying glass to them.

Get people on your team who have had strong experience in your area of business, are flexible and open to change, and most importantly, are passionate about your business idea.

4. Sell to a sizeable market

Your business may have seen over 100% Y-O-Y growth in its initial years, but how much that sums up is also critically important. It’s great to be a big fish in a small pond if your business is going to be funded by the founders and their friends and family. But if you’re thinking of VCs as your next source of funding, you need to have a large enough market to grow into.

The median size of VC investments in the last five years has ranged between $4.3 million and $5 million. For an ROI that ranges from 300 to 1000%, your industry size needs to be at least $13 million to be in the running.

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5. Display what makes you unique

It’s good to have some sales under your belt, a strong potential from growth, a sizeable market, and good business fundamentals. But what works even better to hook and reel in a VC is having a clear differentiation from your competition.

A unique idea or a product that is distinctly different from others in the market has a much stronger chance of growth and sustenance in the long term than a me-too product in a crowded market.

6. Have a realistic business plan

VCs get hundreds of business ideas in their mail every week. Very few of those are even considered for a face-to-face meeting. For that first VC contact, put together a strong business plan that does justice to your business idea.

Being disorganized and missing out on key points is a very real risk that many business owners face. Don’t try to go it alone; you are bound to miss out on something. Get the key members of your team involved.

A solid business plan should cover:

An executive summary
A detailed look at your business idea and the technology behind it
An introduction to your core business team
An overview of the market size and business opportunity
A realistic view of competition and what they’re up to
Your current financials and future projections based on the same
A clear plan of what you’ll do with the money that the VC brings in

7. Set up a clear exit strategy

A venture capitalist can be compared to a speculator who wants to double his money and move out quickly. He’s not there to see you into retirement and watch your children take over and grow the business. Be prepared with a clear exit strategy for your VC. When do you think they can exit your business having made significant returns and what is the ideal process for getting out (divestment, IPO, sale to a competitor, etc.)?

Show off your passion

A great VC pitch is a lot of things, but what matters in the final mile is how well your passion resonates with the VCs who are listening to your pitch. Anyone can rattle off a business idea, financial figures, or innovative technology details. However, a pitch that breaks the ice and touches a nerve is one that sells them your story, your dream, and gets them to see what you can make out of what is into what can be.