As tech businesses dominate the start-up space right now, venture capital investors are particularly drawn to them. This means that there are a lot of tech companies out there trying to grab the attention of venture capitalists to get them to invest in their businesses. If you want to make your tech company stand out from the crowd and win over a venture capitalist, you really need to do your homework.
In this article, we look at how to make your tech business attractive to venture capital investors, how to select the right venture capitalist for your tech business and, finally, how to secure venture capital investment.
- How to make your tech business attractive to venture capital
- How to select the right venture capitalist for your tech business
- How to secure venture capital investment
How to make your tech business attractive to venture capital
In 2019, a record-breaking £10.1 billion was invested in the UK tech industry, up £3.1 billion on the year before, according to research by Dealroom and Tech Nation. Last year, UK tech firms received more venture capital investment than Germany and France combined. So, venture capitalists are already heavily focused on the UK tech market, but there are a lot of UK tech firms out there bidding for their attention. In this climate, to raise venture capital for a tech start-up, you need to do all of these things:
Show that your business is or will be a money-spinner
A venture capitalist’s job is to invest in businesses that will give a fantastic return on their investment. Most venture capitalists look to invest in a business for four to six years. By the time they are ready to exit they want to leave with a lot more cash than they started with. It’s a huge risk. So, if they are interested in investing, they will carry out thorough due diligence on your business. This means that before approaching any potential investors you need to thoroughly prepare to have your business picked apart by them.
If you want to raise venture capital for a tech start-up, you need to be able to show potential investors a long-term business plan, a comprehensive business model, up-to-date accounts and financial predictions that demonstrate that your business is going to do very well for them within a few years. With tech, specifically, they will want to see that you have also secured intellectual property rights for any software or hardware that you’re producing.
Demonstrate that you have a strong leadership team
Your product or service might be great, but you need to show that you have put together a management team that can drive it to become a market leader.
Let’s look back to the videotape era, the arguably superior technology of Sony’s Betamax was in competition with JVC’s VHS, but VHS went on to dominate the market. By reducing the price and employing clever marketing, the team behind VHS managed to position their product so that it wiped out the competition.
Venture capitalists will be looking to see if you have a winning team that knows how to create value and network your offering. Venture capitalists are also likely to want a seat on your board and some control over your company’s operations. Not only will they be looking for a strong team, they will be looking for a team that they feel that they can work well with. Come over too controlling and you will put investors off.
Show that you know your competition
Whether it’s curing motion sickness to help boost the autonomous-car market or developing a fully recyclable electric car battery, there is often more than one start-up working to solve the same problem in the tech industry. You need to be upfront about your competition and who you are racing against and you need to be able to show why you should be first to market and/or able to exist comfortably alongside competing products.
Be able to sell your idea
Tech companies often produce unique products and services; it’s not always easy to get across the huge impact they will have on the world. Think back twenty years, to a time before social media. How would you pitch a totally new concept, such as Facebook, to a backer? How can you get someone to understand its potential to take over the planet? It’s a big ask. You must be able to explain just how ground-breaking what you’re offering is. If you’re not a salesperson, look at hiring one who understands your product and can clearly describe its amazing qualities.
How to select the right venture capitalist for your tech business
Once you have got a plan in place that you are confident has the potential to win over a venture capitalist, you must make yourself and your business known to investors. And so that you don’t waste anyone’s time, you need to make sure that you are targeting the right venture capitalists for your tech business.
You’ll find that tech venture capitalists tend to specialise in one or two particular areas of the tech sector: software as a service (SaaS), environmental tech, machine automation, fintech, etc. etc. Start by researching those venture capitalists that focus on your area of tech. Look at other companies in your field, at your stage of funding, and see which venture capitalists are working with them.
You can start your search with Beauhurst’s rundown of the most active venture capital firms – it provides you with a great starting point, featuring the top 23 venture capital firms currently active in London and also details their investment criteria as well as the types of businesses they’re working with.
Angel investor networks Angel Investment Network and Europe Angel Investors also provide details of high-net-worth individuals looking to work with tech startups and Pitchbook has data on the global venture capital market.
Meanwhile, most venture capitalists list their recent deals on their websites. This will give you an idea of the sectors they focus on and the businesses they invest in; approach those that fit with your business direct.
How to secure venture capital investment
Once you have narrowed down a few venture capitalists that you believe could be interested in your offering, it’s time to start approaching them. Most venture capitalists will invite those looking for funding to contact them via their websites. You will need to provide a history of your company, details on its finances and an explanation of what you will do with an extra injection of capital.
If you spark their interest, they will do some further research on your business and your competitors and if they’re still interested they will probably schedule a meeting with you, either in person or online, and you will need to prepare for a grilling. (Check out our guide on how to prepare for a pitch to kickstart your preparations). If you don’t pass this stage, you should ask for feedback as to why – it will help you with future bids for venture capital funding. If you are successful, it’s contract signing time! But don’t sign anything without a corporate lawyer specialising in legal services for start-ups looking over it first.