Seven Questions Founders Should Ask to Determine If They Are Ready for VC Funding Seven Questions Founders Should Ask to Determine If They Are Ready for VC Funding
Every founder dreams about creating a wildly successful startup that draws enthusiastic support from eager investors. In reality, though, the process of securing capital is complicated and demands that you carefully prepare, and critically analyze your product and your organization and that you really know exactly what you need in terms of capital right now, as well as your expected needs in the future. In my 25-year career in banking and finance, it’s been my honor to work with entrepreneurs and founders at nearly every stage of the startup journey. I’ve been lucky enough to take away a lot of important, useful lessons from those experiences. Before you take your startup on tour through the land of venture capital, ask yourself these seven questions to ensure success:
Is my startup ready for VC funding?
How do I know it’s time to go after VC support? Is it too early? What do I need to show investors to get their attention? When it comes to securing capital, timing matters. VC firms want to see that your startup has achieved some modest milestones: established a revenue stream, secured early customers, and constructed a detailed, realistic plan for growth. If your startup hasn’t reached this stage, then you aren’t yet ready to pitch VCs. Investors want to see an early history of success and a certain level of traction in the marketplace. They need to see that your company is on a growth path and will be able to generate enough revenue to deliver a 5x return on their investment.
The early COVID days provide a cautionary tale for today’s startups. Global uncertainty and an unusual amount of available capital enticed many VCs to jump the gun and invest more aggressively in startups. Some of the entrepreneurs who secured funding had not yet produced revenue and didn’t have a well thought out growth plan. These startups ran out of funds much faster than anticipated. That left the founders in the awkward position of either folding due to lack of funds or going back to investors earlier than planned and requesting more money. Investors quickly lose confidence in a startup that burns through its capital without achieving growth goals. The lesson here is, don’t be too hasty and take on investors before you are ready. It can do more harm than good.
Is my business plan air-tight?
It may sound obvious to say that you need to have a business plan to present to potential investors. It’s more than that, though. Your business plan needs to demonstrate a carefully considered game plan for building a thriving company. Identify milestones and pinpoint target dates for achieving them. When will you bring your product to market? At what point do you anticipate achieving positive growth? Investors want to see that you have thought through the details and that you have a good idea of how much capital you will need to reach your milestones. If you don’t know the answers to these questions yet, then pump the breaks. You aren’t ready to engage investors just yet.
What does my competition look like?
Creating a new product is incredibly exciting, and you won’t be the first founder to be proud of the innovative thing you’ve created and optimistic about its chances of achieving wild success. However, before you engage potential investors, you need to take a step back and objectively assess your product and its competition. Is your product unique? What makes it different from other solutions? Is there any way to make the product more competitive? Don’t let your enthusiasm overtake you. Look at your offering with a critical eye and make changes or improvements so that it is bulletproof. Show potential investors that you’ve taken a deep dive into the market you are operating in, and you’ve got a plan to dominate it.
Who are my customers?
Investors want to hear that you know your target market, how big it is, and how you plan to reach it. You need to demonstrate that you know your customer base backward and forward and that there is enough potential there to propel you toward your growth goals.
Is my team up to the challenge?
VC firms will be looking to see that you have smart, capable, experienced people leading your sales, operations, and marketing teams. They want you to have a Board of Directors in place that provides knowledge and guidance. They will also want to see that you and your team have access to mentors who can share their expertise as you build your company. Make sure your team possesses the knowledge and experience to deliver on your vision and be prepared to demonstrate that to investors.
How much capital do I need?
It’s extremely important to think through how much capital you want to secure before you go out and pitch investors. You need enough money to achieve your growth goals, but you also need to be careful not to over ask. A good rule of thumb is 20 to 30 percent of a company’s valuation. If your company is valued at a million dollars, asking for $200,000-$300,000 is appropriate.
How do I know if a VC firm is a good fit for my startup?
As you look for VC firms to partner with, you need to do your due diligence to make sure they will be the right fit for your company. Look for VCs that have supported other companies in your industry. For example, many VCs will specialize in certain vertical markets, such as bio, pharma, tech, etc. so be sure to match up with firms that align with your market segment. Look for a firm with a portfolio of companies that are complementary to yours. Find out what each VC’s investment strategy is. Pair up with a VC that can introduce you to potential clients or partners. The right VC can help you build your business in more ways than just supplying capital.
Once you’ve done your initial research, get in there and ask questions. It can be delicate to ask probing questions when you are worried about impressing these investors, but ultimately it's vital to understand how the relationship will work before you sign onto it. What vision does the VC have for your company? Do they expect to be hands on and in the mix for decision making, or are they more hands off, preferring to provide guidance from the sidelines? Does the investor prefer a SAFE or convertible notes? Will this VC firm lead the funding round, or are they expecting another investor to manage this? Will they help find the lead funder, or is that up to you? Will they want seats on the Board as part of their investment? You want to secure capital for your startup, but you also have to understand and be comfortable with the terms that come along with that investment. Make sure you’ve asked every question and know every detail before you sign on.
Reflect, research, and then give them your best pitch.
There is so much to be gained by taking an objective look at your startup, its product, and your team in preparation for pitching investors. Like so many challenges in life, preparation is key. If you ask yourself the hard questions before you get in front of VCs, you will be set up for success and ready to prove your startup has what it takes to be the next big thing.
By Marc Romvos, SVP, Business & Government Banking, Leader Bank
Leader Bank's Startup Banking team is here to help with an invaluable knowledge base, personalized relationship banking services, and flexible solutions for both emerging and established funds.
