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What really is the secret to getting a VC deal? [Opinion]

Most entrepreneurs dream of that moment when they get to send out that press release announcing they have struck a venture capital (VC) funding deal. It usually involves millions and millions and it’s a great moment for the startup and the entrepreneurial community.

It is a rockstar moment for the entrepreneur, and a milestone for the startup. For people working at the startup it’s a sign of validation, a sign of success and a sign of growth to come.

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The sad reality is, however, most startups never get there. The headlines and the press releases are loud and proud and create the impression that deals are easy and happen all the time, but the reality is different.

Before the big VC injection most startups have to go through a type of funding ladder, with each rung representing a stamp of credibility as the entrepreneur progresses. At the beginning, most startups are bootstrapped or self-funded.

The sad reality is, however, most startups never get to celebrate the moment they land a VC deal

If they get through this stage then they go through seed funding rounds involving “friends, fools and family”, the people most likely to buy into your entrepreneurial vision with little due diligence required.

As the startup grows further, entrepreneurs often move to angel funding – cash from wealthy individuals which is typically less (and less demanding) than that of venture capital.

This describes a typical path for many startups on their way to the holy grail of venture capital, although there are always exceptions. Startups mostly come from nothing and tech startups, in particular, often feature disruptive and outlandish business models. It’s important that credibility is built over time by following a funding path that shows that people are buying into you.

A venture capitalist will look for these building blocks and you will have a greater chance of pulling off that VC deal of the century.

Five qualities you need

Legendary Venture Capitalist Keet Van Zyl says he looks for five qualities in startup before investing. There has to be a solid investment case: there needs to be a good product or service with a competitive advantage, a large addressable market for the startup, a strong management team, and a scalable business model.

The VC funding the startup founder wants would accelerate growth, backed by a solid strategy and end goal.

Secondly, Van Zyl says the team needs to comprise of “awesome people”. People forget that business is about people. When we work and partner with others, we want to enjoy what we do – and a startup investment is a long journey to success. VCs want it to be a productive and enjoyable journey.

Thirdly, there should be a strong culture. In Van Zyl’s words, the company culture needs “to be solid” in order to celebrate the successes as well as survive the setbacks. Many business gaps can be solved with investment and coaching, but “the one thing you can’t fix with money is a toxic corporate culture”.

Fourth, there needs to be an example of execution or execution capability. There is a common phrase in the startup world that “ideas are worth nothing”. Pretty much the value of an idea without any execution or execution capabilities is zero. It is because most ideas are refined and changed during execution as they adapt to the real world.

And lastly there has to be proven traction. There needs to be some element of momentum that can be demonstrated or quantified. Ideally the startup should be post-revenue. It does not have to be profitable, but at least show that its business model is capable of creating and retaining a paying customer.

Partnership vs single founders

There is one other stage, arguably the most important of all, and it comes right at the beginning. It’s the very first deal the entrepreneur does. It’s when the founder team comes together as a partnership.

Read more: Why I invest in teams over single founders – venture capitalist [Q&A]

There are exceptions but it is the reason VCs prefer founder teams rather than single founders. That very first deal, means that the entrepreneurs managed to convinced each other of the idea, and closed their first important sale.

It is also primarily a risk thing. If something happens to one founder then there is a backup plan — the other founders. Diverse and functioning founder teams are generally more effective than individuals, so VCs see themselves as making an investment in a more productive and faster moving company structure.

A team structure also passes Van Zyl’s “awesome people” test: it shows that a founder can get on with his/her fellow colleagues and human beings and will be receptive to outside suggestions, influence and coaching.

None of the above is absolute, and there are also great single-founder businesses too, some entrepreneurs just start businesses by themselves out of circumstance.

Don’t be in a rush

On your path to venture capital glory it is important to go through these stages and not be in too much of a hurry. It may make you look desperate, and no-one in business likes a desperado. Credibility takes time and only staying power and a startup’s history of success and deal-making will create that credibility.

Once you have the nod from the venture capitalist, expect everything to take some time. The VC may purposely draw out an engagement to get to know you, finalise the due-diligence exercise, watch your business develop and see if some of those claims you make about the future actually show hints of coming true.

Once you have been through all the funding stages and your business is ready for a VC approach, Van Zyl advises that the best way to do it is to get an intro.

Don’t approach the VC firm cold, or you are likely to be ignored. Van Zyl reminds us that one of the largest deal origination sources of startup funding comes through warm referrals.

Matthew Buckland is an investor, entrepreneur and founder This column was first published in his regular column on Business Day (see that version here).

Disclosure: Buckland is an investor in Knife Capital’s Section 12J fund KNF Ventures.

Featured image: nickgesell via Pixabay

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