Venture capital is a type of private equity financing that is provided by venture capitalists to startup companies and small businesses that are deemed to have high growth potential. Venture capitalists are typically experienced investors who provide capital in exchange for equity in the companies they invest in.
We, Big Sky Capital, as VCs often receive investment requests. Most startups are just not ready for investment from Venture Capital firms. Especially, in emerging markets like Central Asia that we are covering. In this article, I want to highlight a few main points that I encountered.
1. Too early.
In most cases, it is pointless to look for VC funding, when all you have is an allegedly great idea and a pitch deck without having actually started your business. In situations when you are still looking for co-founders or you haven’t started building your prototype or you are still surveying potential customers and so on. It is highly unlikely to get the attention of institutional venture capitalists. According to Josh Kopelman, at First Round Capital, Venture capital is like jet fuel, hence you need to have already started to build your rocket before you pull over for your first VC pit stop. Note, I am not talking about well-known, successful serial entrepreneurs. Ideally, founders should know how to bootstrap and achieve the first significant results without cash injections. Useful funding options during the early days can range from family and friends providing initial capital, incubators, or accelerator programs to business angels or subsidy programs. There is no valid, universal answer when it comes to specifying the perfect time for your first VC round. However, there are indications that evidence that you are approaching VC funding readiness. We, at Big Sky Capital, consider a startup is not too early when we see these preconditions. First of all, a well-rounded team is a must, with at least 1–3 founders and initial key hires. You should have your first marketable product ready. This product started generating revenues at an increasing rate and attracted a decent customer pipeline. Finally, you are looking to raise at least USD 300k in total, participating in 100–150k rounds has no sense to a VC. This description implies that if your current status is pre-revenue you are very likely to be too early for us and if your current status is pre-product then you are definitely too early. The previous statement is definitely not true for life science or other deep-tech businesses.
2. Create an Impactful Pitch
A compelling startup pitch deck can be the start of a productive founder-investor relationship, but a vague or over-complicated deck can cause you to miss out on funding opportunities. Present your story in the simplest form possible. When it comes to building your pitch deck, shorter is better — you should be able to fit the key information onto 10 to 12 slides. And please, try to make it professional and visually attractive. There is nothing worse than a high-school-level presentation, pay the designer if needed. More on how to craft a great pitch deck, I will write in future posts. There are a few examples for today: YC, Coinbase, and Guy Kawasaki.
3. Prepare Comprehensive Documentation
Investment decisions are not agreed upon over a coffee after one conversation. Investors of all levels will expect access to a wide range of information to understand the potential and the history of the business, often meaning sharing private, executive-level information. It is important that you have the correct investment materials put together for VCs to take your proposition seriously. For me, as an associate at Big Sky Capital, a well-prepared data room saves lots of time and energy working on a deal. There is a list of documents that I usually ask to provide:
Being prepared with these documents demonstrates professionalism and enhances your chances of attracting investors. I will write a dedicated post on Data room preparation as well.
4. Being legally ready
From a legal perspective, it is obvious that an early-stage startup is just initiating its legal and compliance organization. Founders are very busy with startup operations and fundraising to survive. Most of the time, incorporating a company is pretty much all the legal work that should be ready for starting a seed round. However, very simple steps in legal work could make fundraising a much easier task. Most startups form an LLC or corporation, depending on their financing plan and the chosen jurisdiction of incorporation. “Investor friendly” set of bylaws will increase the VC’s confidence in the company and will also save costs in revision in future rounds. It is also critical to consider setting up a founder’s and employee’s stock option plan and vesting schedule. Vesting provisions not only affect the term sheet but also reflect the level of commitment to ensure the key people of the startup stay properly motivated. Typically, stock options will vest over four years with a one-year cliff. In the early stage, it is common for companies not to have intellectual property protected considering the time and costs involved, but if your startup is building something that needs IP protection you better do it at the beginning. Commercial and employee contracts also must be conducted in legal writing form.
In summary, Venture capital is a people’s business so it does make sense to start your relationships with potential investors early on, ideally before you are in active fundraising mode. Establishing a strong relationship with VCs is particularly important because if things work out well you will spend the next 5 to 10 years working together on your startup. Even if you are not ready for the VC investment, pay attention to the investor’s feedback and try to see lessons from it. These 4 points are not a guide, but they are useful to prepare you to make the first step towards VC investment and ultimately come across more professional, organized, and understanding of the requirements of a Venture Capital Firm.
At Big Sky Capital, we invest in exceptional founders in emerging markets building disruptive SaaS solutions for enterprise. Our firm is based on core set of principles with Founder First mentality. As serial entrepreneurs ourselves, we understand the intricacies of early stage company growth and our goal is to build a VC firm that supports the founders with action.