How to Raise Venture Capital
Raising venture capital isn’t the easiest thing to do. As a Miami Accountant a client of mine and I spent 6 months doing a dog and pony show in front of 21 venture capitalists and none of them were willing to give us money.
We thought we had everything venture capital (VCs) wanted. We had a unique product that solved a pain in the market, there was a lot of good buzz about us in the blogosphere, our user base was growing, and we even had paying clients. To take it one step further, people talked about how our product was so good that Google should buy it.
So why didn’t we get funded? It wasn’t an idea that had the potential to be sold to venture capital investors for nearly 100 million dollars. The business model that venture capital have is that they convince rich people to invest in them and they take that money and invest it into a handful of companies. The majority of those companies will fail, but a few will end up selling for large sums such as 100 million dollars. The money that they make from the companies that sell usually covers their loses and the money they owe their investors.
Now if you failed at raising money, like I did, it doesn’t mean you should quit. Just because someone tells you “NO” the first time, it doesn’t mean they won’t say “YES“ in the future.
The Venture Capital World
Before you go out and start raising money, there are a few things you need to know:
- Venture capital don’t want to hear about ideas; they want to see your company lunched before you ask them for money. If you weren’t willing to put the time and money into launching a beta versionof your company, why would they want to give you money?
- Venture capital aren’t the smartest people out there, but it doesn’t mean they are dumb either. Don’t blow smoke in front of their face or else they will call you out on your bullshit. Be honest every time they ask you question and if you don’t know the answer, it’s OK to say that you don’t know.
- There are 3 different types of Venture capital you can get: early stage, expansion capital, and buyout capital. Before you start your dog and pony show, make sure you know what type of capital you are going after.
- If you are trying to raise a few hundred thousand dollars, you are better off pitching angel investors. Most Venture capital tend to shy away from investing small amounts of capital.
- Business plans are bullshit. You may think they are great but I haven’t seen a Venture capital ever read a business plan or fund a company based off of one. I could be naive, but I think they would rather have you spend your time on launching your company compared to writing a 30-page document.
- People are scared to give money to people they don’t know. If you don’t know any investors you better start getting to know them. You can easily do this by reading and commenting on their blog or by striking up an email conversation with them. Or you could ask your friend or lawyer if they can introduce you to a Venture capital (good lawyers know a ton of VCs).
- In most cases VCs are using other rich people’s money to invest in companies and not their own. This means that they have a boss. So if you hear horror stories about companies getting screwed by them, it isn’t the VC who is being mean. They have to cover their ass as well.
- Make sure a 5 year old can understand your business model. If you can get a 5 year old to understand what you are doing, then a VC will understand what you are doing.
- There are 2 types of investors out there, the first can just provide you with money and second can provide you money and knowledge. The second type of investor is called a strategic investor; ideally you should only take money from a strategic investor.
- If you are looking to raise a few million dollars or more, you usually won’t get it all from one venture capital firm. You will have to get money from multiple Venture capital, but the good news is they believe in the herd mentality. This means that if one Venture capital sees that another Venture capital is interested in giving you money, then they too are naturally interested in giving you money.