How, when and why to approach a VC for funding

There are times when venture capital may make sense for your business. Here’s how to do it right.

In the business world, there is a slight but important distinction in the terms incubator and accelerator. The terms are often used interchangeably, but technically, an incubator is for earlier-stage startups, and the term accelerator pertains to existing companies that desire to accelerate growth. Incubators and accelerators assist business leaders in the quest for success, including how to raise capital, which often involves connecting with VC (Venture Capitalist).

According to Steve Hoffman of Founders Space, a business with expertise in accelerators, most business owners are not prepared when they request a meeting with (or make a pitch to) a Venture Capitalist. Think of that meeting as a championship track meet. Even the most gifted runners will put in great effort in preparing for the moment when the starting gun sounds. As the saying goes, “You never have a second chance to make a first impression.” If you plan to seek venture capital, there are a few things you should have ready before your first meeting.

Your business plan must be exceptionally strong. Before a firm like Founders Space introduces a business owner to a prospective investor, the business plan and product must be uncommon and extraordinary. In most cases, being good is not good enough.

You should know that many investors and businesses like Founders Space will want to be very familiar with the companies they invest in or recommend. Founders Space, for example, requires those they work with to be vetted and their key leaders participate in an online (or on-site) training or consultation program.

What else are VC’s and referring agencies looking for?

Businesses must have a strong and fully-formed team–top tier people who can execute.

The COO must be a dynamic leader, able to attract good people.

If possible, businesses should be prepared to show that their customer base is loyal (evidenced by a high level of repeat and referral sales) and that there is excitement and hunger for existing and future product lines.

An operating business style and climate that is engaging and interactive–a consumer pathway that facilitates customer acquisition and retention. Even more than a great product, financial partners want to invest in a good platform–a platform or environment where buyers, sellers, and sales force personnel interact and contribute to a unique and positive ecosystem your business created.

Businesses must operate in a field where there is projected growth, and be supported by a scalable business plan. Business models that are staff-centered, such as a consulting business, will not meet this qualification. Why? Because no matter how good a consulting service is, it is not easily reproducible or scalable. Investors and partners like business models built on products, not people.

Four common mistakes that can cost a relationship with a VC

  • Business owners often stick with one idea too long. Even if the idea was successful in the past, being locked into a system or process can inhibit growth in the future; this can also raise a red flag to potential investors. Know this: successful startups constantly evaluate and pivot. This is not indecision; this is strategic experimentation. Investors are drawn toward leaders who continually look to improve and are not to tied to processes when more effective methods become known. Remember this adage: “Sacred cows make for the best hamburgers.”
  • Business owners and key managers have a good idea but cannot bring it to fruition. Having a great idea is only the first step on the road to success. Investors are looking for businesses that can execute–who can move the ball all the way down the field and score.
  • The business owner’s vision and product distribution goals are bigger than market projections. For example, a high-tech device designed for seniors over 70 years old likely will find a narrow market. Investors are attracted to business models that reach into large and fast-growing sectors, with few glass ceilings or barriers to growth.
  • The product or service is not unique enough. A company can only realize significant success in our saturated global market by introducing new, exponentially better ideas, or by offering a fundamentally different product. Optimally, your business should offer to solve a problem in a new way or introduce an qualitatively better product.

The post How, When and Why to Approach a VC for Funding appeared first on Inc.

Original source: Inc.

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