Nothing quite measures up to getting that first investment offer in your hands. You can see months and years of hard work and all those late nights translated into a concrete valuation of your company’s worth by a potential investors. It feels amazing to be validated!
While money is the essential purpose of venture capital investment, it isn’t the only thing on offer. Here are a few other things that an entrepreneur should consider during their fundraising.
#1. Seasoned venture capitalists are advisors too
Startups can benefit by finding a venture capital firm that has been in the game a lot longer than you have. An established venture capitalist will have valuable input and be able to provide industry insights. They should be able to give you direction, guiding your business down the right road both financially and otherwise.
The best venture capitalists are the ones willing to be your mentor.
Christopher Quek, a fellow venture capitalist, describes it well in his article on the entrepreneurial journey, “It is without a doubt that any entrepreneur should and must find mentors in their journey. This is to help fill up the necessary gaps, offer a different perspective and provide impartation of business lessons so that you will not be doomed to repeat history.”
It may seem obvious but it is also essential to find a venture capitalist that you get along with. They should share the same values and have a complementary personality style and working style to yours.
#2. Shared Long-Term Vision and Values
With the above in mind, both you and your investor should have long-term vision over short-term gains. You both should be in it for the long haul.
You, as an entrepreneur, should demonstrate your 5 year plan and milestones. You have a long term view of your company for many generations to come. You can also demonstrate your commitment to the industry through additional work you do outside your startup, such as thought leadership, speaking and mentoring. VCs want to see realistic milestones, future goals, potential challenges and solutions.
Focusing purely on short term gains can lead to entrepreneurs sidestepping the interests of the customers and instead concentrating on how much money they can make when the company exits or gets an initial public offering (IPO). They may cut costs from important areas like product testing and brand development.
Understandably, this short-sighted approach is less desirable to investors, who want to see your company continue to grow, as Vinod Khosla explains:
“Our focus is not on exit. In fact, if you talk to any of my entrepreneurs, I’m generally saying, ‘Don’t sell the company,’ when other investors want to sell. I’d much rather focus on building long-term value in building companies rather than worrying about exits.”
Every investment is a risk with a lot of money on the table. Usually this is why venture capitalists will create longer-term plans with due diligence.
#3. Venture Capitalists Can Introduce You to Their Network
A VC firm with a good reputation and connections in your industry is vital for you to succeed. Attracting clients might be that bit easier with an established name in your corner, adding a much-needed trust factor to small businesses which are otherwise unheard of. Alongside this, a reputable VC firm will have already established a network of contacts in the industry that they’ll be able to introduce you to.
Other people VC firms can potentially introduce you to in their network are:
- Start-up founders
- Senior talent and executives
- Industry partnerships
Rather than spending years curating new relationships, start-up companies can gain instant access to a ready-made network of contacts.
As Chris Myers, cofounder and CEO of BodeTree, a tech-enabled franchise services company, says, “Business is all about making the right connections. Whether it’s a matter of attracting new talent, advisors, or customers, knowing the right people dramatically increases your chances of success.”
#4. Venture Capitalists Can Give You a Valuation
Sometimes, entrepreneurs overvalue the worth of their company. One of the ways you can value your company is called the “Venture Capital Method”, whereby a venture capital firm will calculate potentially how much you’ll make in X amount of time if they decided to invest in you. A lot of this is based on ROI (return on investment) which is calculated as: (Financial gain from investment – Cost of investment) / Cost of investment.
At this beginning stage of your start-up, you’ll be looking at pre-money valuation, which is the value of your company at the time an investor gives you money. Venture capitalists will project the expected outcome of your returns. This will give an indication to you of your company’s valuation and worth.
Valuation may differ at different series of funding from seed to Series C according to their valuation. Also note that Chinese VC firms use different calculations methods than their US counterparts.
Questions to ask:
As you can see, raising venture capital funding isn’t all about the money. There are numerable benefits you can receive by partnering with the right venture capital firm for your business. On a base level, the partnership has to be one of trust and mutual benefit for both parties.
Consider the following:
- What stages of funding will the venture capitalist firm take you to?
- How long has the venture capitalist been in the industry for?
- How many companies have they invested in?
- How successful have these companies been?
- How involved do they want to be in your decisions?
From the valuation of your company to the necessity and timing of the move, there are a wide range of factors to consider. When you ask these questions you will ensure that the right VC will give you much more than just money.
Best of luck with your fundraising!
About The Author:
Wayne Shiong is a Partner at venture capital firm China Growth Capital and a contributing author to “Future Layout” by MIT Technology Review. Since joining the firm in 2012, he has orchestrated VC investments in Aibee, Jingchi Technology, DeePhi Tech, Mech Mind, Sobot Tech, Tezign and specialises in Deep Tech.
China Growth Capital is a leading early-stage venture capital firm in China with an extended interest in Silicon Valley. The firm funds seed to Series B in fintech, enterprise tech, and internet consumer sectors. Since its founding in 2006, China Growth Capital has grown to manage 8 Billion RMB (approximately 1.2 Billion USD) in assets and has 229 portfolio companies as of 2017.