"Your start-up is interesting, but come back to me when you have more attraction." This is a common diplomatic phrase made by VC (Venture Capital) when they are not interested in investing in you, but still open the door in case your start-up suddenly becomes a hit and cool.
Coming from a full circle as a fundraising entrepreneur, for now VCs from Limited Partners (LP) and assessing beginners to invest, I realize how different VCs are from an entrepreneur.
Here is a list of 10 questions that will be asked by a VC, which I hope will give entrepreneurs some insight into how fundraising is done, so that they will be better prepared to talk to potential investors.
1. Do you request funding within my reach?
VC and investors come in a range of different tastes. As you can see in the picture above, if you ask for $ 1 million from an angel investor who only invests $ 25k, he won't be able to pay the amount you requested. Likewise, if you approach sovereignty funds (they usually invest $ 20 million and above) for $ 100 thousand in funding, be prepared to be ridiculed and ridiculed.
Before reaching and throwing the ball at the investor, do your due diligence and research. Check the previous quantum investment and see if your investment size is appropriate. When conducting your promotion, clearly show how much you are asking for.
Remember, when looking for a larger amount of investment, you should expect your business proposal to be more solid with good facts and results, with many supporting documents about the assumptions that you make in your vision and projections. Also expect a longer decision-making process.
2. How do I get my money and return it back?
Many entrepreneurs believe that by promoting attractive ideas, investors will go into investment. Maybe, if you are a fat and charismatic successful entrepreneur. But for VC, they are institutional investors who need tangible results.
VC collects money from various sources such as pension funds and larger hedges, individuals with high net worth, family offices, MNC investment branches and so on. They have to answer their records about how the money invested gets results.
You need to clearly show a clear exit strategy or list of strategies, such as a list on the public market, trade sales (to whom), clear dividend policy, Purchase Management (MBO), sales of core IP, etc. Without one of these, VC doesn't know how you return their money.
3. When do I get my money back?
VC is an institutional investor and they have investment funds that have a limited life span, from 5 years to 15 years. It's hard to say the range of funds because it's usually a closely guarded secret.
If new funds start, you will know that you have a good runway to grow your company and give returns to your investors. But if you know the funds have been running for some time, VC will expect a shorter exit timeline to benefit them. You can always try and ask what the foundation of investment is to understand how long VC can invest in your startup before asking permission to leave.
4. How many returns can I expect?
The rule of thumb in the world of fund management is that VC or PE funds must have an IRR of 20 percent per year, although it may differ from funds to funds. Why is that? There are general 2-20 regulations in this industry, which means that management fees of 2 percent are taken from these funds and the interest to be paid is 20 percent.
VC wants you as an investment to produce a minimum IRR of 20 percent in valuation (depending on the valuation methodology that you approve). Usually this level of VC level obstacle is to get their interest.
So it's important to show that your growth projections and valuations are above the estimated return (and you have to prove that your project and assumptions are realistic).
5. Is your vertical startup interesting and suitable for my interests?
Depending on the VC, there may be a strict investment mandate. Some may be limited by geography, or certain verticals such as hardware. So, alignment of interests is important, because it is likely that fund managers are experienced in the vertical field and understand your product quickly and quickly.
Another problem is ensuring that startups are in vertical verticals where valuations are rising and developing. VC uses a comparative industry method, where they will use financial ratios to compare valuations of other companies in the industry.
If you are in a boring vertical that has a low market valuation return rate, chances are the VC will be eager to invest. Remember, they are encouraged to get high results, so they can get greater interest in being carried away.
6. Is your product scaling fast?
Scalable solid business models are the key. Show what makes your company get attraction, and how to compete in the market. In Tri5 Ventures, we have seen companies that are too small to be marketed to other countries because they make it too specific for one country.
Solid products have one revenue stream that covers most of their income. If your startup depends on several revenue streams at an early stage, that means you are not sufficiently focused, or that your business model is not large enough to generate enough income.
VC requires a certain vertical you want, to determine your valuation and growth projections. Having lots of revenue streams makes it difficult to do.
7. Does your startup have a unique and sustainable proposition?
More often than not, we get many suggestions and similar ideas from beginners. And the question I'm going to ask is, "If now a large technology company with $ 10 million enters your space, how do you maintain your market share?"
Having a good IP, a strong team to run your idea, or a good retention rate will be useful. If you only do it with the me-too or me-too style, the business model will look weak, market, and will delay VC.
8. Is your company's capitalization table toxic?
Tri5 Ventures conducted a study of more than 30 shareholders with funds of $ 2 million. Some have founding shares below 50 percent, which means that they are in the best way.
VC will worry that if the founders cannot push their agenda, they will become unmotivated and investment will be chaotic.
Some companies that approach us for seed level funding indicate AMAN agreements or conversion records that are full of certain funding levels. This makes investors afraid of the seed fund level, because the previous round of investors is basically free to go up on the current funding round and get the same profit. VCs generally dislike this agreement and prefer this to be resolved beforehand.
9. Can I trust you with my money?
VC provides a certain level of control to employers when investing in startup. This leads to two things:
CEO and founding team. Can the CEO really gather people and resources to do what he needs to achieve? Are the founding team members behind the CEO? Is the CEO inspiring and trustworthy? Or is this just nonsense?
Some VCs are known to take the time to get to know entrepreneurs and observe the actions of entrepreneurs. This is to assess the character of the entrepreneur before making a decision to invest. This is a relationship that needs to be nurtured, and a certain level of trust must be established before continuing investment.
10. Who else invests in there?
In fact, not all VCs have enough experience to know and understand every vertical in depth. They worry that if they invest themselves, they will not have the experience to help guide the startup to the next funding round or the way out. More likely than not, VCs tend to unite and invest, because mutual names, networks and resources are likely to build a more successful startup.
VC also wants to see if entrepreneurs can convince others to fund it so that they support their decision to invest in startup. So, it is often necessary to go to a number of potential investors and even if investors say no, seek feedback, improve your field and strengthen your investment.
I'm sure the questionnaire is incomplete, but I hope this is a good guide for entrepreneurs to consider before they start looking for investments. Good luck to everyone!