Entrepreneurs typically lay the foundation of their startup by pulling themselves by their bootstraps – at least initially. Later, they seek funding to scale up their business.
It is at this point that they need to decide the right financing option for them. Depending on the requirements and the scope of the business, these options can range from self-financing, angel funding, business loans, venture capital funding, private equity, and alternative financing methods such as crowd-funding and peer-to-peer lending, among others.
A startup fit to access VC funding is one that needs a large amount of cash flow at once. Because VC funding involves greater risk to capital than seed or angel investment, VC firms look for startups that demonstrate high potential, have a robust and defensible IP, have a strong founding team, and whose value proposition is a good product-market fit.
Therefore, in the space between founding and funding, startup founders need to make the necessary preparations to maximise their chance of bagging a robust VC deal.
Naturally, the process of moving a venture from point A to point B is full of challenges, and the main part of the entrepreneurial journey is to identify and resolve them. Here, then, are the top challenges that businesses face during and after they access VC funding.
Creating a scalable business model
To persuade a VC to invest in your startup, you will need to begin by understanding their expectations. VCs look to maximise the rate of their capital generation. Hence, they invest in the startups that can turn this expectation into tangible reality.
A startup with the potential to deliver what the VCs want is one that has a scalable business model. In other words, to secure a VC deal, your venture must be capable of generating profits at a rate that is higher than the one at which it incurs costs.
A scalable business model is capable of achieving such lucrative unit economics. It is characterised by a higher profit margin and lower investment figures that reflect in terms of infrastructure, marketing, and operational costs.
To ramp up the rank of your business in the scalability index, you need to focus on minimising in-house expenses. You can achieve this by outsourcing the non-strategic aspects of your business operations or by integrating automated solutions that can boost your operational efficiency and productivity while minimising the need for investing in human resource.
Demonstrating early-business traction and social proof
This follows from the step above. This step involves a founder asking a VC to put their trust in the venture. The proposal, then, needs to be supported by both rhetoric and facts. Rhetoric consists of you explaining to the VC your business vision, the market you are addressing, the pain point you aim to resolve, and the steps you are taking to achieve your goals.
To substantiate your proposal, you need to demonstrate the feasibility of your product offering by presenting proof of its success. This can be done by supplying numbers and statistics related to revenue growth, average sales or gross margins, the size of the customer base you have captured, the rate at which you are acquiring new customers, the average rate of return visits by a customer, etc.
You can also use the build and iteration of your product to show traction. By presenting the stages of evolution of your product before full launch (including alpha stage and beta stage), you can demonstrate the phases of your business development.
The direction of your product development reflects the learning journey of the founding team. This is a big plus because VCs prefer to invest in maturd founders, who can consistently reinforce the confidence shown by VCs in their venture.
The bottom line: making wise use of capital infusion
Once you have taken care of the essentials, you become equipped to close a VC deal. Securing the support of the right VC is a tough nut to crack. The challenge, however, doesn’t end with bagging a successful deal. More than acquiring the funding, you will need to work harder to deliver on your promise to your investors.
This will involve working sincerely towards achieving your vision – and the sincerity will be demonstrated by how you use the funding. Keeping your investors informed about your spending will go a long way in reinforcing the trust they’ve put in you.
Finally, it is worth remembering that the value of good VCs goes beyond their capital investment; they also support you by offering you strategic guidance and mentorship. With the right VC by your side, you can navigate the highly dynamic market landscape with greater ease and success.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YS.)