Aspiring entrepreneurs with innovative ideas often face the challenge of securing the necessary funding to realize their vision. While there are various funding options, attracting venture capital is a popular choice due to the potential for substantial investment and support from experienced investors. But how can a startup attract venture capital?
Attracting venture capital is challenging and requires careful planning, preparation, and a clear understanding of what investors seek. In the following article, The Recursive explores seven key steps, along with insights from women-led VCs, that help founders to spark VC’s attention and increase their chances of securing the funding needed to take their business to the next level.
Insights were provided by:
- Natália Mikušová, CEO at ZAKA VC
- Diana Koziarska, Founding Partner at SMOK Ventures
7 Tips how can a startup attract venture capital
1. Conduct extensive research
Research is key when attracting venture capital. Market research can help entrepreneurs identify the product-market fit, understand the needs of their target customers, and create a business plan that effectively addresses potential risks and challenges.
By investing time and resources into research, startups can identify unique selling points, develop a product that meets customers’ needs, position themselves for success, and increase their chances of securing funding from venture capitalists.
2. Have a product or solution ready to share
The first step in attracting venture capital is having a product or solution that investors can see and evaluate. According to a report by CB Insights, 35% of startups fail because there’s no market need for their product. Coming right after financial problems, no market need is the second most common reason startups do not succeed, highlighting the importance of having a product or solution that solves a problem or meets a need in the market.
Investors are unlikely to invest without a clear idea of what your startup does and how it can be successful. Your solution should have a clear value proposition and target market that can be easily communicated to potential investors.
3. Prepare your story and journey
Next step how can a startup attract venture capital is presenting a clear story and meaning of your solution.
“For me, the first thing that sparks my interest in a startup is definitely clear thinking. It’s the case when it’s obvious from the pitch deck or intro call that the founder is solving a real problem they are personally familiar with and that the project presentation is not just a patchwork of buzzwords. In addition, it’s always refreshing to see that the founder and the team behind them are lean-minded and traction/growth-oriented. They are aware of the challenges ahead of them and are ready to iterate fast,” says Natália Mikušová, CEO at ZAKA VC.
4. Have a compelling pitch deck and be fiscally healthy and literate
Diana Koziarska, a Founding Partner at SMOK Ventures, says, “The most important document is the pitch deck. Sending a pitch deck to a VC is like throwing a hook. Your aim is to grab attention, make VC interested, and initiate a longer conversation. The deck is here to get us excited about your startup and your team, not to tell us the whole story or answer all our questions. We’re going to spend about a minute looking at your deck and then decide whether or not to book a meeting or ask some questions by email first. So make it attractive and make us want to know more!”
In addition to the pitch deck, investors want to see that you understand your company’s data and financials. You should also have a good grasp of your industry’s financial trends and benchmarks to show you know your company’s position in the market.
“It’s good to prepare a data room ahead. Sharing that when VC asks for more info will make you look well-prepared, and you’ll be able to act quickly. In the data room, it would be useful to have a detailed market and competition analysis, cash flow projections, product roadmap & demo, detailed business plan, traction & metrics, and a cap table,” Diana Koziarska continues.
5. Develop an online conversation with venture capitalists
In today’s digital age, it’s essential to have a strong online presence to attract venture capital. Develop online contact with venture capitalists through social media, blogs, and other platforms, which will help you build relationships with potential investors and keep them engaged with your company’s progress.
“The most effective way is to focus on building your own network and get a warm intro to the investor. Next, one smart written email with a short introduction, USP, and traction description will definitely not end up in the trash and increases the chance of scheduling an intro call with an investor, says Natália Mikušová.
6. Highlight the management team and talent
Investors invest not just in your product or solution but also in your management team and talent. You should highlight the skills and experience of your team to show investors that you have the expertise and leadership to execute your business plan successfully.
A study by Harvard Business Review found that the most successful startup teams are those with strong management. Besides experience, the study highlighted the importance of soft skills. In particular, shared entrepreneurial passion and strategic vision were necessary for outstanding team performance, according to external venture capital investors.
7. Be patient but persistent: Ask for feedback, analyze, and iterate
“Rejection can feel discouraging. But your reaction can affect what you get out of that. Don’t burn bridges! It is a pass now; it can be a yes later. First of all, seek feedback. Don’t be afraid to ask for feedback on your pitch, business model, or anything. Analyze and iterate. It’s up to you to decide which feedback is relevant and what areas of the company to improve. As you do that, it’s another chance to approach new investors better and re-approach those who passed, showing your progress,” says Diana Koziarska.
Diana Koziarska continues, “Build traction. There are so many low and no-code solutions, platforms to cheaply build a website and a product wish list, simple MVP, and, in such a way, to validate the product need with potential customers. The vote from customers is the most important one, especially if they vote with their wallets. Look into alternative funding options: angel investors, crowdfunding, grants, competitions, and bootstrapping from revenue. And be persistent! Many now-successful companies faced multiple rejections. The key is to learn from these experiences, adapt, and maintain your determination to succeed.”