Top 10 tips to attract venture capital funding
Thursday, November 11, 2010/
Earlier this week, the Federal Government announced a plan to inject $80 million into high potential start-ups as part of its Innovation Investment Fund.
Four major venture capital funds will use the money to help start-up companies commercialise their research and see their ideas into reality. The VCs will have to match the government’s outlay, meaning that at least $160 million will be up for grabs.
So what do start-ups have to do to get a slice of the VC pie? We’ve spoken to the VC firms that will be investing the government cash to draw up 10 essential tips on how to attract funding.
1 Sell yourself
Formulate a compelling business plan, which clearly identifies the value proposition, reasons why the business will succeed and how it intends to achieve this success.
New entrepreneurs often have difficulty writing out business plans, but the techniques are simple. Start by writing out your basic concept before gathering all data on feasibility and the specifics of your business concept.
Then focus and refine your concept based on your data. Outline the specifics of your business and put your plan into a form. You can read more on business planning here.
Have a product which addresses a significant market need in a large growing market. Dr Stephen Thompson, of the Medical Research Commercialisation Fund, says funding bodies undertake vigorous research to ensure the products they back will be recognised and valued in the global market.
“We’re always looking for world-class technology or something that can compete on the global stage,” he says.
Do your own research to determine what’s already available throughout the world and whether there are gaps in the market.
Ensure you have a clear competitive advantage and a plan as to how you will maintain that advantage. Before you can accurately identify your competition, define and analyse your target market.
What are you selling and to whom? Then make a list of companies trying to do the same. What are their strengths and weaknesses? Their strategies and goals? Within this, determine what sets your enterprise apart and outline this to prospective investors.
Although it’s important to put forward an original product, management teams will always opt for a more mature opportunity. This means they’re more inclined to back something if they have a clear idea of what the product is and where it fits in the grand scheme of things. Proven concepts that you have improved upon or given a particular competitive edge will be easy for VCs to evaluate.
Dr Thompson says it’s unusual to find a management team that is happy to “wrestle with a platform technology” as it’s much harder to define – and therefore sell – to external parties.
When forming your company, try to lure people who have substantial knowledge in that particular sector. They will be able to add value through their experience, networks and capabilities, which will appeal to a management fund. The more you bring from the outset, in the way of insider knowledge and contacts, the better.
When it comes to teaming up with a fund, you’ll fair far better if you can demonstrate experience in the industry. Carefully picked mentors and employees with deep knowledge of the sector will boost the VC’s confidence in your proposition.
If there are gaps in the management team, be prepared to bring in extra skills. Put the product first by being honest as to whether the business may outgrow you, or how you will acquire additional management skills to meet the needs of your enterprise.
7 Invest in your investors
Be prepared for the investors to take an active interest, including a board seat. In many cases, the investor will have more experience in aspects of the business than the founder.
Use this to your advantage – the investor may be able to help in raising capital and negotiating M&A deals, so highlight these opportunities within your proposal.
The business plan should also lead to an exit for the investors. Make sure the exit plan is realistic, reflects a value that delivers a good return to the investor, and meets the timeframe of the investor.
Don’t set up complex legal structures and contracts unless they’re essential to the business, as these will only scare investors off.
Ensure the financial benefits for the founders match the benefits of the investors – investors want to see the founders’ financial benefit come from the same entity in which they invest.
Also, set up the business in such a way that it will survive detailed due diligence. For example, ownership of technology should be clear and there should be no infringement of intellectual property, clean accounts, etc.
9 To market, to market
Ensure you have a way of getting your product to market. If you can’t get it all the way there with one financial backer, develop it to a point where somebody else will pick it up and run with i
Show you are committed to the success of the venture and 100% dedicated to it. This type of investment is risky and the investor needs to feel you are committed to dealing with problems as they arise. You’d be surprised how much this makes a difference when you’re asking for substantial amounts of money!