Show them the money
Here’s an enlightening guide to what VCs look for in startups, how they define startups and even tips from a VC that’ll help startups give a better pitch to potential investors.
For startups, the most elusive and coveted creature on earth is probably the venture capitalist – an investor who provides capital or supports small businesses at either starting or expansion point. There are a few ways as to how venture capitalists raise funds. ‘When we raise a fund we’ll reach out to our own pool of investors – this can be from institutional funding such as pension funds, insurance companies or through family funds,’ says 33-year-old James Digby, a venture capitalist based in Copenhagen. ‘There are also corporates or governments alongside individuals that make up the mix of our limited partner (LP) base.’
Digby knows what he’s talking about. He’s a personal mentor to a few startups and has more than a decade of entrepreneurial experience working with startups. Furthermore, alongside corporations like Samsung as well as public organisations he develops workshops and lecture on entrepreneurial techniques with a focus on ‘lean’ methodologies and social innovation. Digby’s also a founding partner at the Global Startup Awards, a startup competition that recognises entrepreneurs and their respective supporting ecosystems in 53 countries.
Perking up the interest of venture capitalists
So, one wonders, what are the general things about a company that perk up the interest of venture capitalists? ‘For me, the actual idea is secondary. The importance comes into the original team dynamics,’ Digby replies. ‘Factors such as how long [the partners] have known each other to how often they’ve worked together in other areas or projects is key to making a decision.’
‘Great founders can make a bad idea work [through pivoting] but a bad founder matrix will struggle to make a great idea successful.’
He stresses how it’s critical for any investment they make that they know the founders have the skill and drive to create the magic needed to overcome any obstacle. ‘Great founders can make a bad idea work [through pivoting] but a bad founder matrix will struggle to make a great idea successful.’
In terms of specific verticals, fintech, AI and blockchain are hot areas that most investors are looking at right now, according to Digby. ‘In saying this, we’ve been focused more, however, on how we can implement these types of processes and innovations in order to radically change how we can look at areas such as education, agriculture and healthcare. So, we’ll really make a difference to the world we live in as opposed to being able to make a transaction five per cent cheaper or faster, or get a pizza to my door three minutes quicker,’ he points out.
Defining the role of startups within an economy
‘I think when it comes to measuring whether an organisation is still a “startup” it’s always going to be subjective,’ Digby says carefully. He believes a startup should also be staffed not more than around 550 individuals. ‘It’s hard to think of them as a startup further than this point because then they’re hiring nearly the same if not more than the tech giants and long-established organisations and businesses around.’
Furthermore, Digby explains that startups should also fall into stages to really be able to define where in the startup cycle they actually are. ‘From ideation, minimum viable product (MVP), growth and right through to scale up,’ he adds. ‘Naturally, there are many stages in between that can better identify what the company is looking to achieve at any given point.’
Small though they may seem, startups are vital to an economy. ‘Even though startups may be small companies, they provide a key role for economic growth,’ Digby reaffirms. ‘Through creating new jobs that lead to more employment. And with more people in employment, it leads toward improving an economy. Then, the increased competition creates a healthy appetite for developing innovation and bring new ideas to the forefront, pushing forward what was thought previously as impossible.’
Startups, he adds, also have a direct impact on the local communities. ‘Take for example Philips in Eindhoven, Microsoft in Redmond, Infosys in Bangalore, Google in Mountain View or Alibaba in Hangzhou. They create job opportunities for not only experienced but also young professionals. This, in turn, creates not only a surge of experienced individuals from different cities but also the growth of graduates in the industry and region.’
Moreover, startups boost the economy with innovative technology and create their own industries, often making overnight millionaires of thousands of employees with stock options. ‘According to the Kauffman Foundation, 95 per cent of all American companies are businesses with fewer than 50 employees. This shows how important it is to continue supporting the ideas and innovators of our time,’ Digby reminds.
By supporting great ideas, Digby believes we’re then able to create growth and new jobs while creating innovation in areas that need it, such as education, agriculture and healthcare. ‘These successful entrepreneurs, in turn, will then go on to create other great companies which then leads to a self-perpetuating cycle of improvement and innovation that’ll perpetuate into continued success of not only national but also global economy as a whole.’
Finally, Digby’s tips to those who want to pitch their idea or business plan to a venture capitalist:
1. Entrepreneurs need to showcase how much they understand the business they are in.
2. Learn the pitch inside and out. This also means the numbers and things you’ve said during the pitch. The hard work always begins at Q & A.
3. Finally, don’t forget the ask. Clearly state how much funding you’re looking for and how much of the company you’re willing to give away. You need to be confident in your raise.
This year, WIEF IdeaLab will be held on 16-17 October 2018 at the Goa Institute of Management, India, offering various features including workshops, legal advice for startups and more. For more information or to register click here.