- Startups often falter at not reaching out to VCs at the right time
- The approach should involve background checks on the part of the founders
- How can founders and startups gauge figure out whether an investor is right for them?
Any great idea can be converted into a successful business. But it needs the right support system, the right drivers and the right leader. And of course, it also needs to be fueled by the right amount of funds at the right stage. For most startups, one of the biggest objectives is to get the venture capital (VC) funding that can take their idea to its culmination. VC funding plays a key role in transforming the idea into reality by funding the business from its budding stage to the point of IPO offerings or acquisition. And that’s why outreach efforts are a big priority among startups looking for VC funding.
But, this is possible only if the founder at the startup has the zeal, endurance, and conviction to convince investors about their idea and vision of business growth. But for this, the first thing they need to know is how to reach venture capitalists.
VC Outreach For Startups
Venture capitalists or VCs invest their money while risking losses, and hence look forward to much higher returns or exit opportunities through acquisitions which would give them a profit on their investment. Thus, to pick the right investor and get the funding, knowing the perfect ways of how to reach the venture capitalist is vital.
To learn how to raise venture capital in India, let us take an example of an e-wallet startup to understand the process. Since venture capitalists get a chunk of company equity against the investment made and thus have a say in business strategies of the startup at different stages, they need to understand the idea and the market. So, the first task for the entrepreneur in raising VC funding is to do an extensive market survey and pick those investors that operate in the same sector and or are knowledgeable about it.
Here, the founder with a plan of e-wallet startup has to zero in on investors who operate in the fin-tech sector, or those with a keen eye on the financial sectors.
In order to finalize a deal of venture capital funding into a startup, the investors and VC firms carry out due diligence to assess the ability of the business idea to succeed, the entrepreneur’s outlook and strategy in shaping up the business, taking it ahead towards growth and profit and earning the desired returns.
Finding The Right VC Investor
On similar lines, knowing how to reach venture capitalists is incomplete without learning how to find venture capital investors with a good experience, track record and the correct outlook towards startups and investment. For this, the founder and startup need to do the background check for each of the investors and VC firms in their list of options.
Taking the case of the e-wallet startup example, the founder needs to check whether the investor or capitalist has made deals in fintech startups before and their level of experience in doing so. Further, they need to gather information on their experiences with the current portfolio, how the investor had played a role in strategizing the startup’s business, the terms and conditions they had put forward at different stages of funding and when they made exits, successful and unsuccessful.
Background Checks On Investors
The last step in this background check is gauging the investor outlook, the behavioral patterns, characteristics, and decision-making abilities when it comes to closing a deal and carrying on with future rounds of funding.
Now the founder in the position to approach investors with their idea. The next step in how to reach venture capitalists is making a good business pitch, clearly explaining the business idea and defining the growth path of business through a proper plan and execution strategies, supported with data, information and documents. This is possible only when the startup or founder is ready with a well-researched plan, a good understanding and a clear vision of executing their idea. Following this, the task that remains is approaching and talking at length with the venture capitalist, presenting the pitch and convincing the investor with it.
Fine-tuning The Business Pitch
But there are occasions, where one gets to meet the investor for a very short time. Since talking at length is not possible here, hence the entrepreneur needs to utilize the time, as short as just 30 seconds to explain his business plan, create and impact, and impress the investor enough for a second sitting.
The business pitch presented here thus has to be short, crisp, to the point and impactful. This kind of business pitch, termed elevator pitch in business jargon (one that should be completed within an elevator ride), needs to combine all the key points of the pitch in an interesting, engaging and confident way, without any unnecessary detail and yet shouldn’t sound too much desperate. The key points chosen should be clear and definite, focusing the USP of the business plan, so that the investor is impressed enough to know more about the deal.
Understanding How VCs Work
As the startup ecosystem is gradually growing in the country, wealthy individuals, big enterprises and pensioners’ funds are finding it profitable to invest in and earn returns. These sources pull in the money to form a venture capital, which is managed by a firm that makes a portfolio, invests the money in startups on behalf of them and interferes in the startup’s business strategies to secure returns.
The actual fundholders or the limited partners are paid back returns from the money they provide for investment, while the excess is earned by the VC firm as profit. But of course, all these would succeed only if the right deal is made and the funding is efficiently utilised by the startup to gain a stable growth.
VC firms have limited partners (LP) at the highest level, who provide the fund out of own money and earn returns from its investment. general partners (GP) at the next level manage the fund accumulated, create the investment portfolio finalising deals with chosen startups and have a say in business strategies of the startups where the fund has been invested. For this, they earn management fees as well as carried interest from the share of profits made by the startup.
The associates at the next level are the deal makers, in charge of maintaining relationships with the entrepreneurs. The lowest level is that of the analyst, who observe and analyse market, startups and budding entrepreneurs with potentially high returns and stable growth trends, to choose where to invest venture capital. To sail through these, the entrepreneur needs a thorough knowledge of how to raise a VC fund.
The Approach Is The Key
Knowing how to raise venture capital in India essentially translates to how to approach VC firms in India as VC firms are more popular when it comes to startup funding in this country. Being a relatively new concept in this country, the startup ecosystem is still in the nascent stage and entrepreneurs are mostly first-timers.
Hence, given the high probability of business failures in startups, there is a lack of confidence in startup success due to the inexperience of first-time entrepreneurs and a dearth of track records for the startup ecosystem.
Angel investors or individual capitalists are therefore hard to find. Here, venture capital firms are more likely to invest as they operate on a startup portfolio and cover the losses from one deal with a successful exit in another. But all said and done, the success of startups majorly depends on the outreach efforts by the founders and startups to get that all-important VC funding.
Read More: Inc42