A couple of weeks ago I was in NYC and I had the chance to attend 3 different pitching events involving start-ups at different stages of maturity. Social commerce, copyrights, focus groups, data arbitrage, health, fashion, market places… The first (astonishing!) finding is that Venture Capitalists are humans and as The Dress showed up and as Wittgenstein would confirm, they filter, as all humans, the reality through their own coloured glasses. Can we find a common denominator in the way they think, on what they expect from a pitch and on what could persuade them to fund your company? Maybe yes…
Before you start thinking to look for Angel Investors and Venture Capital, the FIRST and the most important question you should ask to yourself is: Do I really need to get funded? In USA 600.000 new business are launched every year and only 1% of them got funded by VCs. Be sure you deeply grasp the difference between angel investors, seeding and venture capital. If you need 100K, 200K, 500K go for angels or seeding. If you need near or more than 1 million look for venture capital. Usually you first start with angels/seeding and then you move to VC. How to understand if you need VC funding? Well, if you do have a solid business idea that can grow with little capital, do it yourself or with seeding. If you do have an innovative and great business idea not flying without big investments and you are aiming for a long term growth, look for VC. It’s not easy to get in contact with VC firms. The best way is to be introduced through your seeding fund or by your angel investors. Be aware that as soon as you get VC funding you don’t own anymore the 100% of the business. In short: if you don’t need the money don’t take the money.
What investors consider as a key element to invest? If we are talking about tech start up, well the technology side could be a key factor, both as a novel technology or as a different approach to a component. Efficiency and back-end scalability are also key elements. A strong technology not only permits to scale faster, but it acts as well as a barrier to new entrants, preventing competitors to weaken your position. (Porter is nodding) Don’t build on someone else platform: your core business shouldn’t depend by someone else business. Get a full understanding of what APIs can do for you and build an ecosystem around your own technology.
What are the industries considered worth to investing in (by VCs)? Fintech: many investors reported that they would die for a bidding infrastructure or whatever can change the current payment infrastructure. One of the pain point is the fee system: a dream come true would be a system fees-free permitting to transfer money in 3 secs instead than in 3 days (your turn, cryptocurrencies?). Virtual reality and 3D printing. Connection between offline and online: mobile is changing the way we interact with and think about goods. Concierge services and market places: people nowadays want to get access in real time to services and expertise.
Carefully select your investor. Not all investors are the same. Find the one that usually fund the kind of business you are in. If you are talking with someone interested in 3D printing and you are developing an ecommerce…you are both wasting your time. To select the right investors spend sometime on Google. Do your homework: read VCs and angels investors blogs.
Dare to ask. If you are going to meet investors dare to ask for 1 million or more. Obviously it must be for a reason – often this reason is called marketing – and the amount heavily depends by the stage your start up is in. REMIND: think big when asking for money.
What is the Entrepreneur profile that tends to be more successful than others? Some investors opinions: FAST AND FURIOUS The one rising fast and furious, the one who goes for his/her idea in any case and in the go he/she recognise he/she needs funding. He/she will go fast and furious with or without investors. NEVER GIVE UP Persistent, truly committed, full of passion and energy are the basic must have skills. Many people think that is cool and trendy to start a company, indeed it’s really hard work and it’s astonishing easy to give up. BEING TECHNICAL many investors love technical founders because…well… they know how to do things. BEING STUDENTS OF THE INTERNET it means someone who really understand the internet, the users, the trends. It’s not related to your age but to your attitude. If you are in your 20s you should be aware of the history of the Internet, what happened since 10 years ago. In Fintech, an highly regulated market, a key trait is to have the relevant experience and knowledge of the industry. BEING INTELLECTUALLY HONEST even in case of failure. If you are in a bad period be honest with yourself and with your business partners: ask for help, find people able to execute the vision or, if needed, to sell your idea or your company.
How much and what kind of involvement investors really expect? Quite obviously someone would see the dress blue and black whilst someone else would swear that it’s gold and white. Generally speaking all investors in the panel expressed that they like to be quite involved in the business they are funding. Many of them would like to build a good relationship with founders, based on trust, and to be helpful in case of crisis. Others prefer to stay in the observer role and be involved only when they can truly support, like opening up their networks. Some of them aim to be proactive and intuitive, anticipating when a founder needs something. Others investors likes to be really hands on, they see themselves as an extension of the team. Some VC funds, like Google Venture get in charge of the operational side providing experts’ teams of designers, engineers…
Talking about valuations, what seems to be fair? or expressed differently, what is too high? again investors differ. Are we talking about angels, seeding or traditional VCs? What is the stage your start up is in? To the question what is too high one VC replied: “ above 5 millions” another instead “there is not too high“, others that “it depends by the floor price“. As a founder be aware that if your floor at the start is a way too high, you have even more and more strict milestones to respect. Usually the floor price is much lower in NYC than in California. Why? mainly because if you are in California and the company doesn’t work, you can still sell the team (trying to be acqui-hired) and from an investor perspective you can still get 2 or 3 times your investment. Some investors are quite bold: they clearly told they like to get the highest percent for the lowest cash. In case of a really high floor price, the valuation is driven by the stage of the company, by what other people would like to pay for it, by what is going on in the market. The investors, quite obviously, will always try to get something out of their investment. As a founder you should consider that sometimes it could be more convenient selling a business that didn’t work out so you can still cover the initial investment and get some surplus to be shared with investors. Valuations are a complex topic, there are indeed many differences driven by being at early, scaling or exit stage. To know a bit more you can check out fundersandfounders blog.