Too often, entrepreneurs go into a meeting with a venture capital firm as if the result is already a fait accompli, assuming that the venture capitalist has all of the power. They could not be more wrong. While the investor may have already formed an initial opinion, their thoughts are by no means final. Your presentation will be the deciding factor.
With this in mind, most entrepreneurs should be taking a much more proactive approach to raising their first successful seed round. If you are an entrepreneur and the most you know about seed round funding is from what you have seen on Silicon Valley, here are five tips on how to approach a meeting with a potential investor:
Spend time learning about the major players on the firm’s investment team and read up on past companies that they have invested in. How have those investments worked out? How are they similar to or different from your company, and where does your company fit into their overall strategy? Some entrepreneurs mistakenly think that strategic questions are up to the VC partners to address, but you will be a better advocate for yourself and for your company if you come prepared with the answers. You should be able to explain convincingly why your company is a good fit and demonstrate that you have put in time and done your research.
This means more than just tossing out an estimated percentage of market share that you can capture. A diligent VC wants to know that you’ve spoken at length with your customers to understand what drives sales and to figure out what caused former customers to leave. Make sure that your customer analysis contains not just qualitative observations, but also quantitative elements. What will it cost you to add one customer? How does that number scale?
Risks won’t put you out of the running as long as you address them openly and prepare mitigation strategies. An optimistic revenue estimate or customer growth projection will look great on paper, but any VC will want to know what can go wrong and how you’ll recover from any possible mishaps. Take the time to explain in detail what can go wrong, how that would affect your burn rate, and what you would do to recover from any potential damages. A big concern is if a VC flags a risk that you either haven’t considered or haven’t raised.
Some early-stage entrepreneurs focus only on walking away with the highest amount of money possible, but there are other factors to consider when evaluating an investment offer. Bragging rights aside, what do you actually gain from a higher valuation and what do you give up? Look carefully at the terms of the offer, noting how the dilution will affect you and your team, how liquidation preferences are laid out, etc. and keep in mind that once you’ve agreed to something in the initial round, investors in any future rounds of funding will expect the same terms. Choosing more favorable terms over a higher, more aggressive valuation is a valid decision under the right circumstances.
A venture capital firm that invests in you is your true partner. As soon as they write the check, you are in this together. Don’t take that fact lightly and don’t make the mistake of viewing your partnership as purely financial. A surprising number of entrepreneurs seem to forget that venture capitalists have seen it all and can provide valuable outside perspective. They can be a great source of advice when your company is at a turning point and they want to help. They also have extensive networks of industry experts at their fingertips and they can be a great resource if something goes wrong. You don’t want to cross the line by inundating them with phone calls and e-mails but you should definitely keep them updated on your progress and be proactive about asking for help.
Now is this perfect time for entrepreneurs to hone their goals for the new year and to brush up on their presentation skills. As we head into 2017, investors will be eager to partner with up-and-coming companies with the potential to transform their industries. An entrepreneur that understands all of the above points about raising seed funding will be sure to impress them.
Feature image: mama hiro via Flickr.