Do your due diligence.
September 21, 2018 7 min read
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Venture capital (VC) funding in 2017 was the highest it’s been in 10 years, and the momentum has not slowed down. In the first quarter of 2018 alone, VC investments topped $22 billion. The number and size of investment deals also rose correspondingly, with seven companies receiving $500 million+ rounds since the beginning of the year.
Today, raising a significant amount of capital isn’t even surprising anymore. Slack, for instance, just received $427 million in funding, while another San Francisco-based startup called Getaround raised $300 million in Series D funding.
While acquiring capital is still a hurdle for many entrepreneurs, today’s trend seems to be about how much capital investment you actually achieve. In a comprehensive article published by the New York Times, Bill Gurley, a managing partner at Benchmark Capital, said, “If your competitor is going to raise $150 million, and you want to be conservative and only raise $20 million, you’re going to get run over.”
Gurley implies that an entrepreneur looking for VC funding today is at a disadvantage if they don’t pursue an aggressive amount of capital. Before you get to the conversation about how much you need and are asking for, you must first convince potential investors that your product, service or platform is totally unique and worthy of significant capital. The best way to prepare you and your business for the rigorous scrutiny you will be under is to first do the exercise yourself.
Mega deals are in limited supply.
Venture capitalists will always rationalize their investments before committing to a deal. Many rising star companies have imploded within months of landing significant funding, leaving the founders and their investors with little to show for their partnerships.
Consider the case of Jawbone, which accrued nearly $930 million in investor funding, but rapidly lost market share and was forced to shut down in 2017. Drugstore.com was another spectacular failure, raising $157 million from investors — we’re talking Amazon and Kleiner Perkins Caufield & Byers — before folding. These are only a few examples of startups that collapsed, causing investors to lose hundreds of millions of dollars.
Hindsight is always 20/20, so when a large failure hits, everyone is quick to point out the mistakes that should have been so clearly visible in the first place. Investors are in the difficult business of picking winners, which means you as an entrepreneur are in the difficult place of positioning yourself as a winner and proving why your business deserves millions of dollars to pursue its strategies. Without a stellar team, technology or platform, and business plan to communicate your vision for success, investors will be reluctant to get on board.
Here is a checklist to consider before pitching an idea and seeking your mega deal from investors:
1. Know your market and your competitors.
You have already established the basic bar of a talented and inspired team, a competitive and proprietary technology and a strong business plan. But what’s next? Drill down to the granular level of each of these key components. For example, no business plan is complete without a comprehensive competitive analysis. If incumbents already have similar products or services on the market, you must be able to strongly demonstrate how your innovation or platform is unique and where and how large the opportunity is.
You should deeply understand your competitors’ value propositions and the ability for your innovation to upend them. Moreover, you should also be able to determine whether there is a large enough market for a potentially strong return on a VC’s investment, especially if you are seeking hundreds of millions of dollars.
2. Improve the bottom line.
When reviewing your startup’s business model, you may identify areas in which you are not deploying existing capital effectively. This may be due to inexperience, in which case some simple financial mentorship could help you improve your spend. However, if you are burning money for nonessential goods and services at the expense of product development, marketing agency and talent acquisition, those misaligned priorities may indicate deeper problems, which will prevent VCs from investing in you. It’s easy to spend someone else’s money and hard to spend your own. Don’t treat investor money like investor money or fall into the trap of easy come easy go. Treat your dollars as if you earned single one and like every outgoing dollar is a necessity.
3. Do your due diligence.
There is always pressure to act quickly. With such limited time, complete due diligence is nearly impossible, but don’t sweat. You can obtain speedy, objective external screenings out there to assess the market potential of your business idea to complement your own internal analysis. Objective opinions can also be obtained to evaluate your proprietary technology. Before investing in your innovation, venture capitalists want reassurance that your idea is unique and an external screening can provide that objective perspective.
Moderna Therapeutics, a Boston startup that develops mRNA-based drugs, raised $625 million in funding, making it the largest Boston-based funding recipient of 2018. Moderna Therapeutics’ novel platform is among a handful of startups venture capitalists are eager to invest in. Starry, a startup located in Boston and New York, is offering wireless equipment that provides internet speeds up to 1 gigabit. This speed is powered by a technology called “millimeter wave band active phased array,” which is the first of its kind. Want to know how much capital this novel idea has attracted already? A whopping $163 million.
If you want to know if your innovation is truly novel, taking time to verify and performing due diligence on it is imperative. There are ways to get help with this and to do it faster. Complementing your internal assessment efforts with an external analysis can really elevate your insights to position your innovation in the best light. At the end of the day, due diligence is rudimentary in finance. Investors will check, check again, and check in to ensure there is progress via completed milestones. Prepare yourself to meet every possible expectation to win the deal you are seeking.
Discern your way to success.
Most of us don’t do business looking into a glass ball that tells the future, so discerning the quality and quantity of information to inform your strategies as an entrepreneur is critical. Seeking investments is not meant to be easy, especially when you’re seeking mega ones.
Whether you’re pitching to a VC, CVC or individual investors, the ability to discern, distill and effectively communicate all the information about your business (i.e. the novelty or proprietary quality of your product and its large market potential) can entice investors to support your vision. Helping investors see a clear and objective picture of your startup will only provide confidence in the millions of dollars they could commit and lead you to realize your startup’s big success story.