Over the past 40 years, venture capital has been a vital source of financing for high-growth start-ups. Within our team at the Caban group we have certainly seen a significant increase in the amount of entrepreneurs seeking growth capital for their businesses. As entrepreneurs ourselves we realise that there is a point in the lifecycle of most businesses when additional investment is needed to achieve the growth plans of the founders. But what is the right time to look for venture capital?
According toe CB Insights over 90% of venture capital-backed companies that went public between 1980 and 2000 and had positive long-term returns. The growth in technology and the service based economy, technology and the internet has contributed to the amount of business starting and seeking venture capital to support their growth. This has led to venture capital increasingly becoming an essential driver of economic value. According to a recent report by the African Venture Capital Association, the number of reported VC deals in Africa in 2020 more than doubled compared to the year before, reaching an all-time high of 319.
Though venture capitalists may seem mysterious, they are crucial to generating value in the industry. They fill the need for an idea entrepreneur – who has potential but no money – to connect with investors looking for a good investment opportunity. To be sure, most of us generally have an idea of what the individual roles entail, though there is yet much more to be learned about how it all works.
For the entrepreneur it can be difficult to know if you should look for venture capital and specifically what is the right time to look for venture capital. As an entrepreneur, director, or creator of a fast-growing business, you might be reading this article to determine if venture capital is the next phase in your company’s business plan.
What is the right time to look for venture capital?
One of the first steps for venture capital is connecting with entrepreneurs who need funding – a process commonly referred to as accumulating deal flow. For any venture capital firm, access to quality investment opportunities will be key to their success. I often find it interesting to note that when speaking to entrepreneurs, the perception is that its difficult to find growth funding. From the investors side however, the challenge is to find the right investment opportunities.
Ideally, seeking venture capital is not something to do right away. Acquisition should be planned by researching the environment and identifying opportunities early on. From a VC perspective deals are generated by through reaching out to entrepreneurs who share their vision for the future while there would of course also be a large proportion of entrepreneurs being pro-active in searching for investment themselves when growth opportunities are identified.
The right time to send your pitch deck for venture capital is when you become aware of their work in your field or find a meeting of minds through engaging with the VC firms you want to work with. Often this is through word-of-mouth or associations with other startup founders, but many people continue to battle hard for this funding.
The 4 Things Entrepreneurs Need to Know About Venture Capital
An overwhelming majority of start-ups seeking venture capital will not receive funding. VCs review an average of 101 opportunities for every deal closed, which takes an extraordinary amount of time. Venture capitalists typically close a deal within 83 days, and on average do118 hours in due diligence.
The best time to seek venture capital is when you have the most leverage, such as in a strong up-market or when in need for funding in order to stay in the game.
It is important for small businesses to remember that venture capitalists seek investments that offer high returns. It’s common for smaller less established companies to get rejected because their ideas don’t offer the rate of return the investor is looking for. It is up to the founding team to illustrate the potential which their business holds.
Some of the most common questions we get from entrepreneurs on venture capital
What factors do venture capitalists use to decide if they will invest in an entrepreneur’s company? These factors depend on two different frameworks, one of which is the “jockey” or the “horse,” where an entrepreneurial team is the jockey and their business model is the horse. Other VC’s may think that both parts are necessary but ultimately favors the founding management team to be more critical.
When is it appropriate to seek venture capital? Venture capitalists understand that their most successful exits are highly valued. Transactions like M&A or IPOs can generate 100-fold return, but these returns vary. So instead of trying to divine near-term cash flow, VCs identify firms with the potential for big exits.
What has to be in place for a VC to successfully invest? The management team is the most important factor, followed by the opportunity and traction achieved by the business up to that point.
Why it’s important to seek start up funds?
The path of an entrepreneur can be exciting and rewarding for those willing to take the risk. Surveys reveal that both venture capital and private equity investors provide real value through in-depth advisory services, access to their own networks and support where the business needs it once they invest in a company. The mentoring of founders and leaderships teams is also a key priority. Dave Romero of The Caban Group explains, “We do this because we’ve learned time and time again that the founders are key to building and leading the teams that create the biggest outcomes in venture capital: without them, there won’t be any products, customers—nothing.
Be flexible when raising funds for your company
When you pursue venture capital, you need flexibility. Venture capital funding could involve several rounds of investment, and makes it easier to achieve necessary capital when needed.
What are the benefits of venture capital?
Venture capital can be used to expand a company’s business opportunities
With Venture Capital, you can raise funds to continue your business and grow quickly. With this financing, you don’t need to lend collateral and the company isn’t under pressure to repay the loan. It has high initial costs and operates with little operating history, which makes it an excellent candidate for venture capital finance.
Aside from capital, venture capitalists can provide valuable guidance and consultation. Typically, a member of the venture capitalist firm is appointed to the start-up’s board of directors. This allows the venture capitalist to participate in the company’s decisions actively. Venture capitalists expertise and guidance can be beneficial because they have experience building and expanding start-ups. They can assist in developing strategies, technical assistance, and resources, among other things, to ensure the success of a business.
Venture capital as a tool for building connections
The extensive network of a VC may be a big benefit to the growth and success of a startup. Venture capitalists can assist entrepreneurs in forming alliances with potential customers or business partners, which can be very beneficial for its success.
Find out what critical people your company could hire by taking VC money.
Those who do venture capital investment often have a more in-depth understanding of the company. As investors, they are good at seeing the big picture of the company.
How to gauge whether you need venture capital
With the right business, it’s appropriate to seek venture capitalist funding. For example, venture capitalists are more likely to invest in businesses with significant potential for growth. Occasionally, this can leave some startups at a disadvantage, without funding or development guidance.
Finding the right time to exit the business
The right time to seek venture capital is before you need it. That way, you can control when the exit takes place for your business. VCs are under pressure to deliver returns to investors within a set time frame. However, this can force through an exit even if it’s not in the best interest of the business. Make sure you plan appropriately.
How to make better decisions in fast-paced environments
Realize the trade-offs with venture capital funding today. As entrepreneurs seeking funds, you are risking control of your business strategy. Seek investors that are willing to back entrepreneurs and their team for an outcome that will be successful despite trade-offs.
With a VC funding, you can get the latest tools and technology, hire top talent, and grow a company’s potential. Pursuing venture capital early means that acquiring capital would be easier, but that it is more difficult to come up with a project to pursue.