Proving your start-up has long-term potential can be a difficult task, but it is essential if you want to encourage investors to open their wallets. Rich Abrahams, Chief Investment Officer of Sprout, explains how SMEs can approach the process of securing venture capital. He speaks about the five Ms to help get SMEs on the right track.
Securing venture capital (VC) can be a game changer for start-ups and small businesses, providing a huge cash boost to maximise their growth trajectory.
But scoring VC funding is tough to get. Even as global VC investment topped a whopping US$1.1 trillion between 2021 and 2022, less than 1% of start-ups managed to secure these coveted funds.
With competition for financing fierce, convincing investors to open their wallets can be challenging. It takes more than just matching the right business idea with the right investor. Meticulous planning and prep work is critical, with a solid grip on what criteria investors prioritise.
From communicating a compelling value proposition to demonstrating strategic advantages, target market opportunity and growth runways, there are a variety of factors that VCs analyse. With so many potential considerations, it’s tricky to know where to start in converting the right intel to the right people, in the right way.
In my experience, when reviewing opportunities, VCs tend to emphasise what I refer to as the ‘five Ms’ – Management, Market, Model, Momentum and Money.
Management – assembling an A-team
First and foremost, VC investors place great emphasis on the quality and experience of a start-up’s founding team.
Start-ups should showcase their management expertise in an authentic manner. Investors tend to prefer supporting entrepreneurs with proven track records of success. They look for founders with deep expertise in their industry verticals, as well as the vision and capability to develop a company valued in the millions or billions.
Have key members of the leadership team held senior positions for many years or decades? Do they have a history of driving excellence across diverse business functions? Highlighting the complementary skillsets and industry experience of the management team is recommended, with an emphasis on their aptitude to effectively execute the proposed business plan.
Furthermore, bringing on board members or advisors with established business backgrounds can provide additional confidence that the management team will be able to successfully navigate challenges, spur optimal growth and realise strong returns on investment while adding credibility to a brand.
Market – VCs want to see market potential
While the strength of an organisation’s management is crucial, start-ups must also prove that they are operating in a promising market to attract VC support.
While considering suitability is therefore the first step, those organisations working large or high growth segments should thereafter highlight key market prospects to potential investors. What makes this market exciting? Is it ripe for disruption? Is growth accelerating? These are just some of the questions that VCs will have on their mind, and start-ups must be prepared to address them. To VCs, the larger and quicker the market’s growth potential, the more enticing it is to investors.
It’s also crucial to demonstrate an intricate understanding of the market’s dynamics. Showing the ability to anticipate where the market is heading and adapt accordingly gives investors the confidence that you grasp the forces driving demand.
In summary, the goal is to get investors envisioning the immense possibilities if your start-up captures a segment of the market. Enable their imagination to see the potential scale. That’s what makes a market opportunity intriguing and builds excitement about your business.
Machine – game-changing ideas
A start-up’s proprietary technology and intellectual property can provide a significant competitive edge. Game-changing innovations that solve real pain points may create advantages difficult for competitors to replicate quickly.
Start-ups with attractive patented or patentable technologies stand out, as do those leveraging cutting edge capabilities. The technological abilities of the latter can aid in recruiting top talent, drive further innovation, creativity and growth.
These types of technological strengths serve as strong signals to investors for a few reasons: not only do they indicate high growth potential but they also demonstrate a focus on future-readiness and insulation from obsolescence. This provides assurance that investments are likely to be future-proofed.
Momentum – demonstrating traction and momentum
VCs want to see evidence of progress and market validation, not just compelling ideas or teams.
Strong traction and rapid growth demonstrate a start-up’s offering and resonates in the target market. Metrics showing early adoption and repeat usage help validate the underlying business model and future trajectory.
There are, of course, many metrics that can be used to show traction, but the best data points will be those that quantify product. Some of the most interesting for investors include customer acquisition costs, lifetime value, burn rate, revenue growth, margins and retention rates.
It’s also equally important to highlight date where key company milestones have been previously achieved. Tangible evidence that a team is hitting key targets builds investor confidence in the team’s ability to meet future and bigger goals.
Money – demonstrating financial prudence
In today’s market conditions, capital efficiency is under increased scrutiny and investors will want to understand how much has been previously raised, what those funds were used for and the impact of those investments.
Ultimately, prudent spending is the name of the game. Providing VCs with recent examples of sensible spending, plus reasonable and transparent future cost plans can go a long way in convincing VCs to support your start-up. Proving ROI delivery on previous investments can also be a vital differentiator.
Like all rational buyers, investors seek good valuation deals. Ensuring that your valuation is accurate and can be verified with key data will also be crucial in ensuring a deal is struck.
While critical, savvy money management alone is insufficient. To secure venture capital for growth, start-ups must excel across all five key investment criteria. Mastering this mix will boost your odds of funding success.