Venture Capital: The First Word is Venture
While many entrepreneurs are intimidated by the “elusive” world of venture capital, there is no need for them to put on a confident facade. Venture Capitalists are human too! As much of a shock as that is to many, when it comes to fundraising, investors often find themselves in awe of the many great innovations that talented entrepreneurs make. Why is it then, that our innovators of tomorrow look at Venture Capitalists as mythical gods and somehow feel inferior to them? The power dynamic between an entrepreneur and investor is manifested through insecurities and a lack of understanding from the entrepreneur. Fundraising experts understand that Venture Capitalists are actively seeking the next great idea. With that being said, it is important to understand how investors easily dissect each entrepreneur that comes through the door.
When I think about the ecosystem of startup founders, there are usually three types of categories that entrepreneurs fall into:
Founders who take everything an investor says at face value. NEWSFLASH: Investors are trained not to say no. There is a multitude of reasons for this, but its most important to remember that an investor’s job is not to find the next big startup. Rather, their job is to not pass on the next potential unicorn. Become familiar with ways of an investor saying, “no”. Don’t waste your time on a marathon that will never end.
Founders who believe they don’t need any help and are just looking for capital. The quickest way to turn a venture capitalist away from you is to ask for their money. If an investor is taking a meeting with you, it’s because they are potentially interested in investing not just capital, but time, with you. Remember, THEY ARE HUMAN BEINGS TOO! They want to be sure that this is someone they can work with far down the line.
The inquisitive entrepreneur who seeks expertise, knowledge and help. Your number one problem as an entrepreneur should not be that you need capital. Your number one problem as an entrepreneur should be that you do not want to spread yourself too thin and are looking to align yourself with other like-minded individuals. Entrepreneurs who ask for advice and help, look less desperate and more in control of their own startup’s destiny. As investors, we understand that you need assistance! The best founders aren’t afraid to admit this.
It is essential to remember that Venture Capital is a vehicle for accelerated growth, not just an infusion of capital. Most of the points above about problems investors face with founders, are around the topic of capital. Capital is the second word in Venture Capital. It comes second because capital is not essential to founding a successful startup. The truth is, it is possible to bootstrap a startup with your own money to a profitable exit. Capital naturally comes to those who are in actual need of it. Founding a successful venture on the other hand is a completely different story, and as mentioned above, takes a bit of help from experts within the industry. Hence, where investors come into the fold.
Below are going to be three ways to approach and identify investors that are right fits for your startup. In turn, the power dynamic that entrepreneurs often feel with investors, becomes flipped:
How Do They Differ from Other Firms with a Similar Investment Thesis? As hard as it is to found a startup that is truly original, it is even harder for VC funds to differentiate themselves. An entrepreneurs due diligence on a firm is really shown when they begin to question a firm’s investment thesis. General Partners at venture capital firms should not have to only pitch to Limited Partners, but they should be pitching startups on why they are a strategic fit.
How Can They Help Your Startup? It is important to understand what a venture capital firm offers beyond capital. You want to know if the investor you are potentially working with is a previous founder, an expert growth hacker, fundraising expert, or just simply has the right connections in the industry to help your business. Investors can offer plenty of help, but you have to take the initiative in asking for it.
Understand Their History of Investments. If you can’t find information online about their portfolio, ask them about it. It is a great way to know an investor’s mindset and thought process. If there are portfolio companies in similar industries, business models, etc. with successful exits, quiz the investor on those companies. See what knowledge you can glean from them and also find out if they understand why one of their portfolio companies had a successful exit. This is a great segway into your own startup’s exit strategy.
What I hope you take away from this is that venture capital is a medium for helping a startup grow. Nothing more, nothing less! Simply, investors are advisors to your startup. Think about it, if you take away the capital that investors are armed with, what do they become in your eyes?