It’s an exciting — and nerve-wracking — time as your young company prepares to draw investor interest in Series A funding.
It’s most likely your company’s first in-depth contact with the venture capital world, but how do you know your business is ready to take such a step? Here are some things to consider:
- You’ve put out feelers. VC firms don’t just show up on your doorstep when you need them most. Start your meet and greets long before your company is ready for that critical first major cash infusion. Begin networking and see which firms offer the most ideal fit. Then keep them updated on your achievements and milestones.
- Your company has started to mature. Sure, it’s still young and you’re all about the exciting products or technology you’re bringing to market, but more is expected at this seed stage. VC firms want to know about your culture, the inner workings of your management team and your plan of attack for capturing market share. They want to read your business plan and be convinced that you understand your market and know how to build out.
- You’re acquiring customers. Evidence of traction and momentum is often times more important than revenue at this stage. Your job is to convince VCs that the market has responded positively. You’ve figured out how to capture customers cost efficiently and at sufficiently high margins.
- You haven’t scaled up too quickly. One of the biggest reasons for start-up failure is lack of fiscal control. Companies are turned down if it looks like they’ve built out too fast and in a disorganized way before perfecting their product offering.
- Your company is a good fit. Beyond the spreadsheets, it’s the intangibles that are important. After all, the VC firm is responsible for its institutional investors and the stakes are already impossibly high. Only about 12 percent of startups make it the whole way through from seed to Series B (about 25 percent from seed to A and about 35 percent from A to B). VCs understand the importance of chemistry and following their instincts.
- You’re looking for expertise as much as funding. You’re going to give up some power. Your VC will take a board seat, voting rights, preferred stock and possibly as much as 30 percent of your company. Do you have a problem with that? Your VC isn’t just a cash cow. He or she is also your mentor, adviser and someone who’s been where you’re trying to get. This is an incredibly valuable relationship if you see the potential — and a bad marriage if you don’t.