Best practices when pursuing early-stage venture funding

Only a fraction of startups ever see Venture Capital money. How can you increase your chances of a successful capital raise?

According to a 2017 Report by The Startup Genome Project, there are between 6,300 and 7,800 currently active tech startups in NYC, making it the second largest startup ecosystem in the world. However, only 619 of those startups were backed by Venture Capital. This is just one example that highlights the small percentage (about 8.5% in this report) that ever see access to institutional seed funding.

After working with startups every day, we see a wide range of approaches taken by those looking to obtain external capital, and we thought it would be a good idea to share some of the best practices for increasing the success rate of receiving early-stage funding.

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1. Have all diligence support materials ready  - including clean financials

By investing in your company, a Venture Capital firm is tying their investment objectives to your success as a business, and therefore they will want to know your operations at a very detailed level before making a capital commitment. These type of due diligence requirements usually present themselves in the form of a detailed investment questionnaire as well as a detailed pitch deck or business plan.

Here’s what you need to know about presenting financial statements to potential investors:

  • Your cash flow, revenue and expense numbers in your financial statements are a clear indication of how well you truly understand your business strategy. While a smartly constructed pitch deck might make a good first impression, the clean and well-structured financials are where you can highlight business performance and organization.

  • Your company’s debt and liabilities are also an important concern for investors, since they determine how risky the investment might be. For potential investors, some of the biggest red flags include unpaid taxes, previous loans, deferred salaries and unrecorded liabilities.

Investors don’t expect founders to be fully proficient in finance and accounting, but they do expect a CEO to have a strong grasp of their company’s financial health and a clear plan of how they intend to use proceeds from a capital raise.

2. Create a Warm Leads Strategy

Would you rather buy a car from a trusted close friend you’ve known your entire life, or a funny looking car salesman you’ve just met?

In Venture Capital, trust is that much more important. Since investors are directly tied to the success of your company, establishing strong relationships based on trust and transparency with your investors is an absolute must. This process is made even easier if you make inroads with personal connections who can vouch for your character or integrity and provide a referral on your behalf. While this may seem like intuitive advice, business leaders often overlook important contacts they have in their personal network.

One common approach is to check your 1st and 2nd connections on LinkedIn and determine if anyone you know can make a direct introduction. Even a simple note from a mutual friend can lead to a warmer initial conversation than if you began reaching out to potential investors cold. Introductions through LinkedIn also allow potential contacts to discover each others’ backgrounds in an informative way before the conversation. This may allow for you both to establish a common ground ahead of time.

3. Find an Investor Group Niche

Another major mistake that startups make in their fund-seeking approach is that they try to pitch to anyone and everyone with prioritizing investors based on fit. Often, a targeted approach is more suitable and will allow a founder to spend more time pursuing investors that possess industry experience and are a good fit. When choosing investors, consider the following factors:

  • Their background. Someone with a similar past to yours will be much more likely to understand your reasoning, trust your knowledge, and invest into your venture.

  • Their typical startup. If your startup is creating a physical product that is B2C, make sure that particularly investor or group is no solely focused on enterprise companies. Completing this type of pre-work is essential towards producing the right investor conversations from the onset without wasting time for either party.

For example, here’s a list of 12 Angel Investor groups currently active in NYC. Check out how different they are - one focuses on Millennial education and others focus investments on female founders.

4. Study VC-backed Failures

According to Union Square Ventures co-founder Fred Wilson, only about 1 or 2 out of 10 Venture Capital-backed companies ever show adequate returns on investment. This leads to a natural conclusion that even if an early-stage company does receive funding, it is likely that company will not result in a positive liquidity event for its investors.

So what happens to the other 8-9 companies? Usually, they simply make big management mistakes that cost them unrecoverable losses.

History teaches us that a range of internal and external factors contribute to startup success and failure. For additional reading, here is a popular post-mortem on 7 failed startups and the conditions that led to their downfall: 7 Failed Startups Lessons Learned.