Venture capitalists (VCs) invest money into early-stage businesses to help them grow. We sat down with some of our members and asked a VC some questions about how it all works.
Q: My pool of investors is ready for our next round, but no one wants to step up as the lead investor. What’s the next step to overcome this hurdle?
A: It’s not uncommon for investors to hesitate. Generate FOMO (Fear of Missing Out) around your round to spur action. If your current investors aren’t taking the lead, consider finding new ones who are willing. Investors who haven’t led before might not start now, so seek someone ready to take the lead. Don’t invest time in those who just give positive feedback without commitment. Tip: If unsure about an investor’s leading or following stance, ask them or contact founders they’ve invested in for references.
Q: What businesses attract VCs?
A: Focus on the scale your business can achieve, not just growth. VCs aim for a substantial return, turning a £1 million investment into £50 million in 5-10 years. However, VC isn’t suitable for most businesses.
Consider not only the money but also the stress and pressure working with VCs entails. A lifestyle business can often be more fulfilling with a better return on investment. Tip: Google “Powerlaw” to understand VC dynamics.
Q: What deal terms interest you?
A: Growth. Most fund cycles are 10 years, so returns must happen within that time frame. VC money circulates from business to business, so fewer exits mean less for pre-seed/seed rounds in the future.
Q: How do VCs view valuation?
A: In pre/seed or seed stages, determining a precise valuation can be challenging. Avoid being overly aggressive and plan for the next round. Double your estimated time or money because, more often than not, you’ll need more.
Q: What team are VCs looking for?
A: Convey the attitude of “Don’t worry, I’ve got this.” Your founding team needs to be compelling and instil confidence in investors.
Q: Investors claim to invest in teams, not just businesses. My potential investor backed out, citing the business’s reliance on me. Is this genuine?
A: Feedback from investors who don’t want to lead can be questionable. While people matter, your business should function independently of you. Work on systems and processes to address this concern. However, there might be other undisclosed issues.
Q: Competitors across the pond have high valuations and substantial funding. Is this an issue for UK businesses?
A: The European market tends to be more risk-averse, making business in the US more straightforward. Crazy valuations have pros and cons. Develop a solid strategy to compete with US counterparts, considering potential acquisition by larger US companies.