Venture capital is the money that investors provide your startup. They provide it because they perceive you have long-term growth potential.
Without venture capital, many startups don’t have access to the money they need to grow their business. This isn’t without risks for the investor, though. But, the outlook is good for above-average returns if the startup succeeds.
Now that we’ve defined it, let’s look at the state of venture capital in 2016.
Venture Capital Steady
With the economy now back to pre-recession levels, startup companies have seen a surge in venture capital funding during the last few years. In fact, funding has been strong for seven years now.
According to a Mattermark analysis, venture capitalists have increased their investment tempo this year in terms of both dollars deployed and rounds funded.
Yet, many industry analysts say it’s hard to know what to expect as we move forward into the second half of 2016. Why?
Well, the markets are still in turmoil, and the $1 billion unicorn companies seem to be holding off on IPO’s, so it makes the future a bit of an unknown.
Venture Capitalists Cautious
While there is capital to be found, you can expect venture capitalists to be cautious as they invest.
They don’t seem to be driven as much by the dollar as they are by fear. Investors are careful with their investments, and they acknowledge that it’s not “growth at all costs.”
What Are VCs Looking For?
Venture capitalists in 2016 are looking for well-defined and strongly scrutinized companies. They are looking for founders who know what they’re getting into because they understand the market.
In today’s market, it seems the workhorses have the upper hand, not the unicorns.
Quite realistically, today’s venture capitalists realize that chasing unicorns isn’t always the best path to profitability.
They want reassurance that the product is solid, and they expect extensive legwork. They don’t want to invest in the “next best idea” and hope it pays off years down the road.
They want to see paperwork that details the product, the startup company’s goals, solutions to anticipated problems, and the exit.
Venture capitalists in 2016 want you to work backwards. Tell them exactly how they are going to make their money back, plus the profits you expect.
More often, venture capitalists want to see you have a product that is already generating revenue.
They are more likely to hand over capital for sales and execution. They are less likely to invest in research and development.
How to Succeed Today
So, how can you obtain venture capital in 2016?
When you create your pitch, demonstrate an astute understanding of the problem your product solves, why it’s better than any other, the solution it provides, your market size, the competitive landscape and your revenue model.
Hone your presentation skills, and learn a few sales techniques. This will help you when you make your pitch.
Don’t pitch your product unless you have done all of the legwork the venture capitalist might like to see.
Here are some things your venture capitalist would like you to provide during your pitch meeting:
- Your business plan. Include a one, three and five-year plan.
- A description of your management team, including their background information.
- A complete analysis of the competition and what sets your product apart.
- A detailed evaluation of the market. Who is your target, and how will you enter the market?
- Your marketing strategy.
- A detailed description of your product, how it works, and why it’s best.
- A reason why you brought the product to market. Who wants it? Why would they want it? What problem does it solve? And, how do you know?
- How much money you’ve already raised and your revenue plan.
The venture capital market is doing quite well so far in 2016. That can change on a dime, though. While things have been fine for a few months, we don’t know what the future holds.
If the stock market remains healthy, things will look good. You’ll find there is still plenty of capital left in the market for 2016. So, it’s time to start raising money.
Are you a new startup? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.
Image: Anders Jilden