Conceptualizing a business idea is one thing, and getting it off the ground is another. And one stumbling block is funding. All businesses, of course, entail fixed and variable expenses. So, for that reason, many startup founders need to seek investors. But how do they know if they are qualified for venture capital money?
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Signs that Your Startup Is Ready for Raising Venture Capital
There are several indicators signifying you are ready to seek investors in the venture capital industry.
1. You Are Ready to Scale Your Business
If it comes to a point where the demand is more than supply, you should think about scaling your business. And so, two things come to mind. The first is to increase production or expand services to cater to market needs. The second is to increase the market base by creating value propositions for new customer segments or venturing into new areas.
For those things to happen, you would need money. But if that is not an option, you may seek a round of venture capital to scale your business.
2. You Have What Venture Capitalists Want
One of the most critical factors influencing VCs is the founding management team. If you have a positive reputation and proven track record, the chances of getting funded are better than average. But if you are a relatively new entrepreneur, the road to raising venture capital may be bumpy.
As with most startups, you could contact potential venture capital investors by sending cold emails. At the same time, think of ways to meet like-minded people and entrepreneurs. As you expand your professional network, some of the people you meet may refer you to a VC. Or, you may even meet some of them yourself in these circles.
Besides your experience in managing and running a business, track record, reputation, VCs also look at the business model. One aspect that they look at, in particular, is the revenue stream. They want to know how they can profit if they commit money to you. In this regard, show them how your business can make money. At the same time, they would also need to see a clear, viable exit strategy.
All of the above means nothing if the market opportunity is average. It means that your value proposition should cater to a large customer segment and capture value. And that can happen if a venture capital firm provides you with the funds.
In essence, a sign you are ready for VC funding is when you have a great management team, a solid revenue stream, and an enormous market opportunity. These are among the things VCs want for their portfolio companies.
3. You Can Work Under Pressure and Stress
A venture firm will set up a board of directors as part of the deal. On the plus side, they can offer strategic advice and help mitigate financial risks. While transparency is beneficial, it also brings enormous pressure on you.
Remember that venture investors want a quick return on their investments. As a result, they will put you under the microscope, scrutinizing everything you do. Usually, they do that when you report to the board of investors.
Because the board will evaluate your performance, you will have to be meticulous in documenting reporting metrics in all aspects of the business. The amount of work needed and the degree of scrutiny can be stressful. If that is not enough, you should realize that VCs might bring in new management if you underperform. Worse, they also have liquidation rights if the company is floundering.
Signs that It Is Not the Time to Seek Venture Capital Firms
Fundraising is a time-consuming process that can take up most of your time. Unless your startup is progressing smoothly and you have the time, it would be next to impossible to seek investors. But suppose you cannot afford the distractions. In that case, you should also consider other funding sources that do not take you away from developing your core business.
At any rate, here are more signs that you are not ready to seek venture capital.
1. You Don’t Have a Solid Business Model
A poorly constructed business model can only lead to one conclusion – and it is not a good one. So, be sure to spend time and carefully build each of the nine blocks that make up a business model.
How important is a business model?
VCs automatically reject lousy business models. And if this is your first time seeking funds, it does not make for a good look. So, instead of harming your reputation, take the time to prepare a solid business model. It should show, among others, your value proposition and how you will generate revenue.
2. You Don’t Have a Financial Plan
The financial plan is one thing that VCs scrutinize. Before approaching a venture capitalist, you should create a thorough plan. These would include, among other things, the following:
- Financial forecasts
- Bottom-up and top-down financial projections
- Planned budgets
Since an investor is giving you the money, they want an assurance that you know what you are doing. They would also like to see how you spend the funds. You can appease them by having a detailed financial plan. Be sure to show them the cost of milestones you want to achieve.
But if for some reason, you cannot come up with a detailed financial plan, you should seek help first before seeking potential investors.
3. You Don’t Have a Good Management Team
VCs rate the management team as the factor they consider the most in surveys, besides the founder’s reputation and track record.
Being the founder, they would also want to see if you are committed to your vision. They need to know that you will not take their money and misuse or leave them hanging.
No single person, though, can create a successful business. And so, you would also need to have a team in place. VCs will put them under scrutiny because they can make or break you. So, before you try to raise money from VC firms, be sure to assemble a great team. Otherwise, it would not be the right time to raise funds.
Ready or Not to Raise Venture Capital?
After founding your startup, it is only fitting that you spend the time to develop the business. And if the thought of raising funds comes to mind, then ask yourself if you are ready or not.
It is not the time if you have yet to develop a solid business model and create a thorough financial plan. And, if you do not have a talented team in place, VCs will look the other way.
But if you have what VCs are looking for and are ready to scale up your business, then go ahead. There are many ways to find venture firms. One of the easiest ways is to take advantage of the Allianse startup investor platform. Once you sign up and fill in the necessary details, they will match you with the best investors that suit your business.