As a founder, it is tempting to base your company’s value on that of other players that operate in your space. However, may be issues with this line of thought. For most early-stage companies, comparable investment data alone will not paint a complete picture of the company’s potential. While data on valuations and capital raises is critical, you may be limited by the availability of recent data and find wide variations in values between comparable companies. As such, it is equally important to develop a strong network and establish relationships with investors throughout your investment journey.
There are two key concepts to consider when fundraising:
|1. Finding the Right Investors
Understand the investment thesis of the investor and identify their level of interest in your company and others like it
|2. Communicating the Right Message
Develop the messaging of your company’s value, vision and direction when communicating with investors
Venture capital (VC) firms can be broadly categorized into two groups: high-volume generalists and market-vertical specialists.
For companies that serve niche markets, chances of success with the generalist firms are much lower, as these VCs will likely have a higher-level understanding of a given sector and are overall less interested in niche markets. Specialist firms, however, will focus on certain market verticals while making fewer overall investments.
Investigate VC portfolios to help identify which ones invest in market verticals that align with your company, as they are more likely to be a receptive audience. If possible, identify the partners within firms that lead deals for comparable companies; finding individuals who have an understanding of and interest in your technology or market and cultivating them as a champion for your company can significantly reduce the barrier to entry with that VC.
|Speaking with specialist investors can come with its own unique challenges. As MaRS experts Dennis Ensing and Jenny Yang note, many specialist investors, especially those based in the U.S., will likely be very well informed on market segments that relate to your company. These investors are likely to have a better background than you will during a pitch meeting and may possess knowledge that you do not.
Experts in the field will test your understanding of your market and assess how your company is positioned within that space. Many U.S. investors are interested in learning about the solutions you have to offer and the vision you have for the company; you may find limited success in simply listing off data on comparables within your space.
As previously noted, investment data on early-stage companies will be highly variable and unlikely to provide a consensus on capital raise amount, valuations or overall company trajectory. Additionally, relevant data may be difficult to find if your market is highly niche or emerging. In these situations where data is sparse, it is better to focus on developing the relationship with the investor and establishing the human connection with the partners to whom you are pitching.
Treat the engagements with prospective investors as a test for a sales pitch to future customers; if an investor is unwilling to buy into the company, why would a customer?
Most investors are focused on the idea and direction of the company. They often aren’t as interested in knowing what other comparable data is out there, even if those companies’ offerings are similar. It is useful to reference these comparables later in your sales pitch, but don’t rely on the data to carry you through the discussion.
|Focus instead on outlining other qualities of your company, such as:
Establish the qualitative strengths that your company and team have to offer, and avoid basing your messaging around what others have accomplished. Ultimately, investors will act as your first customers for the company, not by purchasing your product or service, but instead purchasing your vision and potential as a future player in your sector.