Business Startups: How to Pitch Your Idea to a Venture Capitalist
If you have seen the popular ABC reality-series “Shark Tank,” then you probably already know everything about raising capital for your business and pitching to a venture capitalist, right? Wrong. While the dramatic show makes for a good television series, it should not be your guide to understanding venture capital fund raising. This article is designed to help you understand whether your idea is the kind that should be pitched to a venture capitalist, and how to better pitch the idea you may have.
If you are looking to fund your dreams for a bright, financially prosperous future, you are going to need more than a few Benjamin Franklins. Before jumping into the ins and outs of pitching to a venture capitalist, it is important to consider other types of financing. Here are a few ideas to consider if you think pitching to a venture capitalist may not be the way to go:
Thanks to the internet, social media, and other virtual mediums, the costs involved with starting up a business are at an all-time low. While this option may not seem as attractive as working with Mark Cuban, this form of financing allows you to have complete control of your business and allows you to keep all of your equity. On the other hand, it may translate to more elbow grease and a slower takeoff.
Family and Friends
While this idea may seem quite stressful, seeking capital from family and friends is actually one of the most efficient ways to raise money for startups. Think about it, your family and friends already believe in you and want you to succeed. Later on, their investments could also help you secure a deal with other investors as they see that there are others who believe in you.
Crowdfunding campaigns allows startups and individuals to reach out to extremely large audiences in relatively small amounts of time. While invitations to contribute money to the business are not as personal through these kinds of services as they would be in an intimate setting, the sheer volume of people that businesses can reach allows for many donations from surprising sources, mostly small investors.
If your business supports a new technology or an important cause, there could be a grant waiting for you. While receiving these grants will probably take time and work, they do not cost you any equity. Visit Grants.gov for more information.
For many entrepreneurs looking to fund their young businesses, the most attractive way to raise capital is by finding the right venture capitalist. A venture capitalist is an investor who provides funding for small businesses that lack public funding opportunities. When you look for the right venture firm, look for ones who have core values similar to yours. After all, these investments are not just about giving you capital—they will be interested in what you do and how it is going to change the world (or at least your market). Next, look for venture capitalists whose area of expertise is in the industry you are trying to get into. This will increase your chances getting them to listen to your pitch.
Remember, while the investor’s cut of businesses they finance may not look like much at first, they could stand to gain massive returns by making deals with the right start-ups. On the other hand, the investors have a great deal to lose if the businesses they invest in do not grow. Because of this high-risk, high-reward concept, venture capitalists can be extremely selective about which businesses to back. What does all of this mean? Your pitch needs to be perfect. Here are some tips that will help you stand out and get an offer when you pitch your idea to a venture capitalist:
Know Your Audience
Before you walk into a venture capitalist’s office, you need to research the investor(s) you are going to be meeting and adapt your strategy accordingly. Unfortunately, you probably will not be able to learn about your investors by watching reality TV shows. What are their interests? What industry have they worked in? What have they prioritized in their businesses? What is their fund size? With this knowledge, adapt your pitch and practice it over and over until there are no weak points in your presentation. Remember, you are trying to find the simplest possible explanation of your company, then tailoring it for the venture capitalist you are meeting with.
Simply walking in and giving your pitch or sending an email will rarely get you the positive attention you are looking for from a venture capitalist. If you have a connection with a venture capitalist, ask for an introduction beforehand. If you have no connections, network and create one. When you are finally doing your pitch, be confident and bold in your startup, but respectful of the investor’s time. Investors are not only investing in your business, but they are investing in you. If they cannot see themselves maintaining a good professional relationship with you, it may not matter how good your startup is, they will not make you an offer.
Tell Your Product’s Story
Venture capitalists listen to multiple pitches a day. The most powerful way to explain your product’s value is with a story, preferably a real story. Tell how you or someone had a problem and explain how you came up with this idea to solve it. Tell them about your ups and downs, potential investors will want to hear about how you struggled early on and how you overcame obstacles to get where you are today. By telling stories, your will relate more with the venture capitalists and make your product more memorable.
Bring a Prototype
If your startup will involve selling a product, try to have a working product for the investor(s) to see. This will greatly increase your chances of getting funded. If you do not have a working model, at least bring any plans, drawings, or diagrams so that you can show them everything you can about your product
Know your Financial Plan
Know everything about your business, especially the finances. Venture capitalists will want to talk numbers with you. If you are unprepared to keep up with them, you might as well walk out the door. When the funds run out, where do you see your business? Do you see your business having enough success to raise more funds? Where do you see your business in five years? Will it be expanding? Investors are interested in seeing what your plans are for your business and a strong knowledge of the numbers (and where they come from) will impress them and increase their confidence in you.
Have a Closing Summary
Besides the main pitch you prepare for your product, you should also come up with a strong closing summary about your business that provides a concise and clear summary of everything you want to achieve with the capital you are asking for. This will help wrap everything up for the investor.
Remember Relevant Laws!
There are many laws that apply to businesses who are seeking financing. For example, in many cases, you will need to comply with securities laws—or find an exception to those laws. Violating securities laws is a FELONY and can leave you exposed to lawsuits and worse. You should definitely consult with knowledgeable professionals before seeking financing. You will also want to have a knowledgeable attorney to help review the deal documents, as well as possibly help during negotiations. If you’re seeking financing for your business, then the venture capitalists you talk to have done this many, many more times than you have. Be careful! There are many stories of business owners who inadvertently gave away control—or even their entire company—because they didn’t understand all the legal issues involved in getting financing.
In closing, remember to stay confident, keep your body language and voice natural, know the ins and outs of your business perfectly (especially the numbers), and tell your potential investors a story. Coming prepared with this kind of a pitch will increase your chances of getting the funding you need. If venture capital firms are not right for your business, there are plenty of other financing options for your startup. If you are a small business and need legal advice about getting funding for your business, contact our Arizona business lawyers today.
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