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Raising funding for an early-stage venture is always difficult. There is no bottled recipe for success, but even if you have a great concept that is scalable combined with a passionate team that can execute the growth strategy, you still need to communicate this in a multifaceted investor’s pitch.
Most entrepreneurs can give a fair account of the top line business strategic growth path, dive into the complexities of the product or service offering, put together a good industry analysis, name a handful of possible clients and present enticing year three to five financial projections, but this will not necessarily get you to the due diligence phase.
Unless all of this is based on solid research, the application for venture capital (VC) funding will most likely get rejected. In my experience as funder of early-stage businesses, the following seemingly easy questions are stumbling blocks that just about never get answered satisfactorily.
- “Describe your business in simple terms”
- “Explain your revenue streams”
- “Talk me through the business Strengths, Weaknesses, Opportunities and Threats”
- “Clearly define and describe your target market”
- “What do you require the funding for?”
- “What is the most likely exit strategy for investors?”
Yes, I know that you sent me a detailed business plan with five attachments and your PowerPoint presentation had awesome graphics, but please just tell me what you do — or intend to do — in one sentence without all the adjectives and jargon. What most entrepreneurs don’t realise is that this is not only about the VC understanding the business model, but also an assessment on whether the concept can be communicated clearly to prospective customers.
Revenue is not a one-liner on an excel spreadsheet, but made up of various sales categories of the business’s products and/or services. Multiple revenue streams are preferred, as are recurring revenue streams that can scale up. VCs analyse and characterise revenue streams in terms of volatility, predictability, risk, and return. And while all of this seems over-complicated, it is critical to understand and articulate the different methods by which money will be coming into the business.
The good old SWOT Analysis that entrepreneurs usually get half right. To impress potential funders, the business Strengths and Opportunities are never-ending (not a bad thing, 50% pass-mark), but there is usually only one Weakness: “lack of adequate funding to unlock the list of opportunities” and only one Threat: “losing first-mover advantage when the competition wake up to the gap in the market”.
As VCs are in the business of managing risk, we are very interested in whether you have a good grasp of your business weaknesses (and are open enough as a potential partner to list them), and understand the industry well enough to anticipate potential threats.
By now we do realise that if you reach only 1% of the Chinese population your (very conservative) projections will be exceeded, and the stats for downloading apps are staggering, but insightful market segmentation in a business plan is as scarce as a concise executive summary. Be customer-focused as opposed to product-focused and use a bottom-up approach: Where is your market niche; who will you target in your sales strategy — describe the existing market and its potential for growth.
Sometimes you almost get the feeling that entrepreneurs don’t actually believe that they will succeed in the fund-raising quest. Think of this as your ‘shopping list’ for the funding amount. If you suddenly had all that growth capital, what would you spend it on and how will this translate in revenue growth? Link this with a timeline.
Tip: the term ‘Working Capital’ is the balancing figure, not the full extent of your shopping list.
While this question will mostly be analysed from an investor perspective in terms of their access to networks and potential value add, the entrepreneur needs to clearly illustrate that the business model will result in likely profit for prospective investors. “Listing in three years” and “Sale to a strategic investor” are too generic. The business growth strategy should culminate in some sort of an exit event for the VC investor, and it is always encouraging to see that the investee has at least considered your needs on some level.
If an entrepreneur seeking venture capital incorporates insightful answers to these questions in his/her investor’s pitch, the likelihood of proceeding to the next round of due diligence will increase significantly.