While a great idea or product may put your emerging growth company in the running, breaking away from the crowd does take a significant amount of homework.
November 5, 2018 6 min read
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According to Crunchbase, July 2018 "set a record for the number of nine-figure rounds raise worldwide." There were 55 rounds accounting for around $15 billion in venture capital deal flow. As we approach year-end, however, it is unclear whether this level of super giant deal flow will be sustained. Given the increase in mega rounds, on the surface, it may appear that selected startups are overnight success stories. But, that's not the case.
To attract quality and high-volume VC money, startup founders should be strategic and purposeful. We have heard it often enough: Timing is everything. To acquire venture funding, emerging growth companies should typically have a product or service that is well accepted in the market and generating a significant amount of revenue at a rapid growth rate. Beyond that, following are key factors influencing venture capital investment decisions:
The investing mindset is constantly evolving based on real-time trends and long-term impact. Investors tend to place their bets based on five to 10-year projections of the innovation's marketplace impact. With little more than an idea or a concept to go on, they may look to current consumer or business trends and conduct an in-depth analysis of sector and market dynamics to arrive at an informed decision.
Today, core investment areas include cybersecurity, robotic process automation, cognitive computing, data analytics and the internet of things -- among several others. These technologies are finding their way into nearly every industry. Examples include:
- Next-generation industrialization. Manufacturers are increasing investments in plant equipment that communicates via the internet to monitor supplies, inventory, maintenance needs and production processes.
- Autonomous cars. Automotive, technology and transportation companies are developing fleets of cars that can navigate themselves by sensing information about their surroundings.
- Genomics. Life sciences firms are creating more effective ways to identify, predict, treat and manage diseases through the decoding of a patient's personal biology.
- Home automation. Technology and appliance manufacturers are equipping products with built-in systems that enable remote control and monitoring.
- Insurance on demand. Insurance carriers are using data analytics and cognitive computing to streamline underwriting, provide micro- and usage-based coverages and settle claims.
For an emerging growth company, this means relevance is key. Show where your product fits at the intersection of industry and the technologies that attract investment dollars. If that proves challenging -- as it might for ideas that are really cutting-edge -- then provide context regarding what technological advancements are taking place in the world.
Venture capitalists typically target companies with high growth potential. The typical threshold can be about $100 million in revenue within five years. Opportunities smaller than that are less likely to be funded.
Competition is a key consideration as well. However, the existence of competition is not necessarily a disqualifier, especially if a clear leader has yet to emerge. There can be room for multiple billion-dollar companies -- the so-called unicorns that VCs ultimately seek -- in any given market.
To make your case with investors, consider the total available market. This refers to the amount of revenue your product could yield. Provided you have a logistical explanation and back-up information, you may use estimated figures. Explaining where your product fits, including relevant channels is important. Additionally, consider educating investors on a longer-term outlook.
Impact of the concept
A single attribute could generate significant return for a company, and therefore, could be the key driver of a VC's investment. The attribute might be, for example, the unique user interface, the underlying algorithms or the way that data is captured. Whatever it is, if that attribute is innovative enough, it can make a significant difference.
An offering need not break entirely new ground to be interesting to VCs. Consider where significant technology investments are going today -- financial technology (fintech), medical technology (medtech), and insurance technology (insurtech) companies are good examples. Many of them are not creating new models or industries. They are upending the ones that were already there.
The degree of disruption is what often gets investor attention. With disruption comes opportunity and many exciting opportunities are exponential rather than linear. Count on investors to do the math and target the largest potential gains.
VCs often favor well-known founders with a proven track record in launching new businesses. Additionally, they may assign weight to a founder's personality, enthusiasm and knowledge. Of course, not every founder has the gift of persuasion or a strong entrepreneurial pedigree. The good news is that other qualities count as well. They include:
- An elite education with associated network
- Experience at a top technology company
- A founding team with a track record of successfully working together
- Reliable data, execution and customer references
- A top-notch advisory board
Look at options to bolster your image and your team. This assessment includes ensuring you surround yourself with professionals who have contacts and credibility in the target industry.
Some products are nice to have, but not necessarily essential. Others are so critical to daily life, work or well-being that consumers or businesses will make them a core part of the budget.
If your product is one of the former -- or is close enough to a competing product that it fails to generate strong interest -- you may be challenged to persuade VC investors. If your product is in the latter category, it could still prove challenging if the market is too narrow to pique VC interest. Many valuable ideas are big enough to generate a loyal customer base and a comfortable living for the founders. However, they may not be big enough to scale in a way that attracts venture capital; rather, they may be better candidates for other types of funding such as high net worth individuals, venture debt or traditional bank loans -- or it may be best for the founders to self-invest.
Candid feedback from potential customers, trading partners and suppliers can help to size up a startup's potential. In some cases, the product may be a solution to a problem too few have. Other times, the product may be so advanced that the market is not yet ready for it. Either way, these insights can help prevent you from approaching VCs prematurely, preserving your goodwill for a more auspicious time.
While a great idea or product may put your emerging growth company in the running, breaking away from the crowd does take a significant amount of homework. This includes being ready with a response to the considerations that come up during investor due diligence. Add patience, focus and relentless execution, and you just might find that time is on your side.