Do not be frustrated if you have failed to raise capital from venture capital funds. Only a very small percentage of companies do raise capital from venture capital funds – and in the current environment, this percentage is even less.
Main Reasons rejected by venture capital funds
o The deal is too small – many venture capital funds have mandates – minimum investment would be $1 million or $10m, if you are just seeking for a small capital, they will not talk to you.
o New Company – start-ups should go for alternatives rather than venture capital funds, there are specific start-up funding providers or investors or apply for grants.
o Lack of existing revenue – Look, let us be realistic about it – would you invest in a business that has no revenue established or a business that has 3 years of revenue. If you have made profit, even a small profit, show venture capital companies that. Some have said that it is 10 times harder for a business to raise capital without revenue.
o Too Technical – You have the best idea but unable to express them in plain English (or other languages) to venture capital firms. Remember what Warren Buffet’s golden rule – “Never invest in things you do not understand”
o Relying on Corporate Advisors and Brokers – If you do nothing and rely on corporate advisors or brokers, it will be impossible to raise capital. You have to work with them closely, you have to improve your business, write press releases, advisors or brokers can not do them for you.
o Demonstrate that “I do not need the money” – ironically, venture capital funds always like to invest in businesses that are already sustainable or already on track – the businesses that actually do not capital to survive but the capital to grow or expand. If you can demonstrate that, venture capital funds will come and knock on your door.
When I set up my business for the very first time, I could fund the business myself from my own investments – I then grew my business from $0 revenue to a profitable business in 12 months, and had good growth for next 2 years. I went to venture capital funds in the first 12 months for the working capital and was turned back immediately.
2nd year into my business, I was approached by other venture capital funds to see how I was going, and 3rd year into business, I was approached by the same venture capital funds who were interested in my business – this was much easier as I was then after expansion capital instead of working capital.
So, rule no.1 is always build up your business first, make it worthwhile then talk to venture capital funds – not raise the capital first and build the business.
Unless your ideas or applications are really state-of-art, and there is no shortage of great concepts that have raised money from venture capital such as MySpace, Twitters or eve Facebook – but all of them have demonstrated there is a solid business- such as number of members, members growth rate – these are also regarded as company assets.
Remember, Hotmail was sold to Microsoft – because it has millions of registered users – and smart companies can use them for marketing purpose. So, when comes to asset of the company, sometimes it is not just the financial aspects, but what your company can really bring and that is your special point.
Some of the good examples are – maybe your particular website has a specific target group of visitors, I have a website with around 20,000 members but they are all Chinese speaking investors for instance, there are also some Hispanic news websites which have very niche target audiences.