Yaneek Page A simple strategy to secure venture capital investment
QUESTION: I came up with an innovative business idea that I would like to start next year in the real estate industry, which you know is where the money is right now. My question is not so much about getting stuff started, but more regarding access to investors to build it up. The kinda capital needed I can’t get from any bank, so big-money investors is where I’m going. A friend helped me with the pitch deck, and I got a list of people I’m going to pitch to. What else do you recommend?
– Reader
BUSINESSWISE: I’m going to share the simplest strategy to win over almost any potential investor and it is this: find the right answer to these five questions.
1. What does a venture capitalist want to accomplish most?
2. What would make a savvy venture capitalist feel comfortable enough to invest in a new venture that they have just heard of and operated by someone they just met?
3. What are these types of investors most afraid of, and what would turn them off the most?
4. What is the winning risk-management strategy that has allowed them to successfully take on risks considered too unmanageable for most financiers?
5. What would you need to do to take your business public by way of an initial public offering on the stock exchange?
Once you can find the right answers to these critical questions you will have a blueprint for winning over some of the most discerning investors. The next step is to take the appropriate action to satisfy the fundamentals of being “investment ready”.
I will kick-start the question-and-answer and then leave you with the homework of doing more in-depth work so that you are well prepared.
Answer 1: Venture capitalists want to make great investments. They want to win. They expect huge returns because they are taking on big risks that most would not. They often expect steady cash flows, which would consist of their principal investment and profits, on a consistent basis – quarterly, or annual, or even monthly – depending on the type of business and the deal.
Answer 2: They need to be convinced that your business will be a great financial investment, that you will be a great fit to work with, and can lead the business on a highly successful journey. They don’t invest in strangers. By the time their due diligence is done, they should know almost everything about you that is relevant to making the decisions that they have to make. That includes your expertise, your professional background, personal background, credit worthiness, integrity, ability to be mentored and to work with others, your vision or lack thereof, and your ability to do what you say you are going to do.
Answer 3: Venture capitalists are most afraid of making a bad investment decision. They don’t want to invest in any deal where they are unlikely to get their money back or unlikely to get consistent cash flows. They are afraid of not earning the profit projected, and so on. They are also afraid of getting into business with the wrong person who will negatively impact their portfolio and their reputation. Reputational risk is huge!
Answer 4: A winning risk-management strategy is proper due diligence; striking a good deal relative to ownership stake; a favourable valuation – some may even say undervaluation if they are sharkish; a solid governance structure; seats on your board of directors; liquidation preferences so that they have the right to recoup their investment before everyone else; protective provisions like staged funding, which will hold you accountable for meeting goals and executing on your business plan the way you said you would. They also always have a solid exit strategy that would allow them to cash out their investment at the first indicators of trouble.
Answer 5: the simplest answer is to read the prospectus of recent IPOs that have come on the market in recent years. In a nutshell, the business must be marketed as highly lucrative, with a solid past history of performance, great prospects for future growth, a compelling strategy for how the investment dollars received will enable that future growth, best-in-class governance and leadership structure, a solid management team. This must be verified by the professionals such as auditors, attorneys, financial consultants, brokers, and so on.
Now that you have your basic answers, it is time to get to work on further research and implementation of critical success factors that will allow your business to be investment ready.
A few things that you should keep top of mind is the current high interest rate, high-inflation environment, which has not been favourable for most stock markets around the world, particularly for Jamaica, which is among the worst-performing markets in the world this year, following two years as one of the best.
In these circumstances, many investors, including venture capitalists, tend to be very cautious about how they invest their money and often prefer maintaining high liquidity. This is the context that you must confront as one of your critical SuccessFactors. It will not be easy, but if you are justifiably confident in your business venture then it is possible.
Best of luck and one love!
Yaneek Page is the programme lead for Market Entry USA, and a certified trainer in entrepreneurship.yaneek.page@gmail.com