When it comes to technology ventures, software has been taking the lead in terms of the number of rounds cleared. Recently advances in the space however have made it practical for hardware companies to raise capital for their projects. The biggest reasons why software has taken the lead is because the iteration cycle is smaller and also the fact hardware tends to be more cumbersome.
Today however, investors are now branching into hardware startups because device development has become much easier than in the past. Rather than requiring specialized equipment which often filled entire labs, Arduino and Raspberry Pi boards now allow virtually anyone (including children) to hone their Electrical Engineering skills with only a standard computer and a curious mind.
Ultimately however this shift in hardware will be covered in a later article, but it is important to note that venture capitalists are now warming up a bit to hardware despite it being more complex than software.
The Benefit of Crowdfunding
While many venture capitalists and traditional financiers look down on crowdfunding as being a modern day gold rush where everyone is looking for a quick buck, crowdfunding can be a vital entrepreneurial tool if used properly. In particular a crowdfunding campaign can be used to test the waters and make sure your idea actually has a market. Additionally if you have a successful crwowdfunding campaign, you can take that to an investor to justify your request for funding.
Keep in mind that this method only works with hardware/product startups since crowdfunding isn’t really intended for service oriented companies.
What VC’s Look for in Entrepreneurs
One of the most important points taken from the venture capital panel at CES is that the average venture capital investment lasts longer than the typical marriage. This means that one of the biggest factors an investor considers when making a decision is how well the team members know each other. Ultimately investors will only consider working with teams who have already weathered major challenges since entrepreneurship is rarely a smooth path.
When it comes to the size of companies that investors aim to work with, typically a venture capitalist will seek five to ten times their initial investment, on at least a $5 MM deal. Keep in mind that market size also is a key consideration and most venture capitalists will only consider investments in sectors with “billion dollar ideas.”
Investors also embrace a long term perspective and avoid chasing fads – meaning that in many cases they are looking for sectors which will be around for at least a decade.
How Investors Find Deals
As with the traditional job application process, networking is one of the best ways to get your foot in the door with a fund. Typically funds will have a theme they focus on so before sending out your pitch decks, it is crucial to do your research on the funds you pitch to, so you can be sure that you’re pitching to the right people.
How Investors Relate to Four Year Olds
If you manage to land an appointment with an investor, keep in mind that most investors have the attention span of a four year old. Not because they’re stupid, but because they deal with dozens of pitches every day.
When you’re doing your initial presentation, don’t focus on rosy projections and dry financial figures. Investors know any projection from an entrepreneur is going to be useless. Unless you have the ability to predict the future, an investor isn’t going to care about where you think the industry is headed.
Accelerators Don’t Equal Funding
Accelerators are one of the hottest ways for entrepreneurs to launch their ideas and possibly get the funding they need, however they don’t make or break a startup. In fact when looking at accelerators, for the entrepreneurs the biggest benefits are that they get help to ask questions that matter while walking away with their plans validated with feedback from industry experts.
Do investors prefer startups which go through accelerators? In most cases, they remain neutral because an accelerator to them doesn’t serve as a filter since most funds have their own due-diligence teams. Rather the value of an accelerator is that the participants are surrounded by like minded professionals who can help them on their journey to success.
No Money is Better Than Dumb Money
One of the biggest mistakes aspiring entrepreneurs make when looking for investors is that they will chase after supposed “seed funds” without looking at the expertise or track records of the people running the funds. In fact, some “seed funds” are nothing more than legalized ways for wealthy individuals to rip-off promising ideas of aspiring entrepreneurs.
While it is impractical to mention names in this article, keep in mind that venture and angel investing is not only about the money. Anyone can pump money into a company. As an entrepreneur, you want to find someone who can be a partner to your business and compliment your success. By having a solid team backing your company, you can flourish regardless of the amount of money the investor pumps in.
Bootstrapping Still is Ideal
Even with the greatest idea, you should always act as if you will never close a round of capital because since most entrepreneurs never land a round of funding. Ultimately the only startups which a venture capitalist will invest in are ones which can scale instantly and which the entrepreneur is literally ready to floor their efforts and go above and beyond.
If you’re looking to build a business at a slow and steady pace, or if your idea isn’t time sensitive, bootstrapping is a much better route because you can maintain control of your business and grow it at your own pace.
Do you have any tips on raising venture capital or thoughts on this topic? If so, leave your thoughts below!