Posted on August 8, 2018
With so many new ideas and companies being founded every year, Venture Capital funding (VC funding) is always one of the primary funding options for startups looking to scale-up and grow.
Although many VC funds exist globally, each with their own strategy and preferences, there are several misconceptions about VC Funds and how entrepreneurs should interact with them.
I have heard them all, but these are the main ones I wanted to clarify.
Entrepreneurs often think their ideas are equally appealing to all investors and if one VC fund states an opinion about the investment then all VCs should follow suit. Each VC fund has different parameters ranging from investment stage, preferred industries, ticket size and overall strategy.
An investment that may be attractive to a certain VC might not be to another.
To maximize chances to get invested in, startups should map the VCs they have access to and see which one(s) meet their investment criteria. Although this does not guarantee a 100% investment, the chances will increase significantly thanks to the better fit.
This goes to both the VC and startups. VC funds always look for the best investments that align with their strategy and the most exciting startups. If more than one startup qualifies, it is very probable that a VC will invest in them.
As such, startups should not consider raising VC funds as a competition. A startup getting VC funding will not affect the chances of another startup being funded. A startup getting VC funding should not think about fundraising as a race. Good startups will always attract the attention of investors.
Although in rare cases VC funds might start a bidding war on a certain company, it is more likely however that they collaborate on many cases and co-invest.
Co-investment has been a rising trend, particularly in the MENA region, as it allows VCs to pool a bigger overall round for the founders, get validation from multiple independent sources, mitigate risk, and also, most importantly, give startups access to a bigger network.
Let’s be clear on this one, VC firms are for-profit companies and are looking for the best return on investment from their portfolio. This is often wrongly considered self-interest. The reality is much simpler: VCs and entrepreneurs are shareholders in the same company making them defacto partners. The success of a startup becomes the success of all shareholders, making the interests of entrepreneurs, investors, and VC funds aligned.
The main role of a VC fund is to provide growth capital for a startup; no ambiguity in this. However, many VCs also act as advisors and mentors to their startups. While the level of involvement and depth given by a VC depends on the startups’ needs, some startups get in-depth support in certain areas such as strategy, marketing, HR, etc.
VC team members or advisors will often commit significant time helping a portfolio company. Other kinds of support may include introductions and links to other investors or even service providers.
Many startups don’t apply for VC funding fearing they will be rejected and lose the opportunity; and often postpone scheduling meetings with VCs. Most VCs will meet again with startups they had originally rejected especially if the first impression or business model had been good; this possibly leads to the same VC investing in that formerly-rejected startup. However, for this to happen a startup must have either made a huge leap in terms of traction, KPIs, product or might have changed/adjusted its business model becoming more attractive for an investment. A startup having understood the reasons for its first rejection and fixed them should have no problem in scheduling follow up meetings with previously contacted VCs.
The strength of a team is a major factor for a VC investing in a startup. A good team can execute its strategy, grow the company and most importantly adjust and pivot when the market assumptions change. However, no matter the team’s strength, a strong business plan and/or an innovative product are just as important.
This might sound funny but when you think about it… You start with the players getting to know each other and checking for attraction, then follows the investment which is close to getting married, while an exit is akin to a separation. And like any relationship, ups and downs happen but if the partnership is strong, it remains and grows.
/ About the writer /
Souhail Khoury is an Investment Associate at Berytech Fund II. Souhail has more than 7 years of experience in technology and entrepreneurship. Prior to joining Berytech Fund Management, Souhail worked at Samsung’s MENA Headquarters and launched an Accelerator for Intigral, Saudi Telecom’s Digital Media Arm. He has been a judge in many startup competitions in the MENA Region. Souhail holds an MBA from Insead, a Master’s degree in Digital Business and Strategy from HEC Paris and a Computer Engineering Degree from the American University of Beirut.