Thu, 07 Mar 2013

There is “more money than deals right now in Quebec” according to David Nault from iNovia Capital, and the situation is similar across Canada. If this is the case, why does obtaining VC funding seem out of reach for so many entrepreneurs?

Simply put, venture capital is not for every company. Venture capitalists look for certain characteristics when they choose to invest, and not every entrepreneur knows how to bring out these qualities nor does every company have them.

First, your company’s growth potential has to be big.

                                                   How big?
                        REALLY BIG.

To illustrate, investors in a standard $100 million fund expect an annual return of 20% over 10 years, and an average fund holds 15% equity for each company in its portfolio while making most of its return on 20% of its investments. Let’s say the VC invests in 20 companies and that only four of those become truly profitable. To justify the investment, each of these companies has to have the potential to grow to a value of at least $500 Million (table 1). Now ask yourself, does my company and team have the potential to be one of these situations?

Table 1 - Average return of a VC fund
Fund size	$100 M
Term	10 years
Expected annual return	20%
Expected fund size at end of term	$300 M
Average equity position in companies	15 %
Expected market capitalization of companies	$2 B
Profitable companies	4
Value of each profitable company	$500 M

Hopefully you said yes, but what is most important is that the VC thinks you have that potential. In his presentation at Growtalks Montreal, David Nault stressed the following areas that VCs would be interested in.

They will be interested in your business model. Is the market large enough for your business? Is the business scalable? Do you know the lifetime value of your customers, customer acquisition cost and churn rate? How about your burn rate and breakeven point? These are only a few of the metrics that you should know. Some might not apply to your particular company but you should be able to isolate those that are key in your situation and use them to show that you have traction and an enormous growth potential.

They will be interested in your team. Do you have the domain knowledge, track record, and ability to build this type of business? Will you be able to grow the business at breakneck speed? Can you manage a $500 million business? They also need to be convinced that they will enjoy working with you: there has to be a certain “fit”. Luckily, you can increase your odds of finding the right “fit” if you research your VCs before pitching. VCs like to invest in familiar markets. It is easier for them to predict their odds and provide you with better advice. It also increases the chances that they will be able to introduce you to other company executives and provide partnership opportunities. Research your potential VCs.

Finally, in the event you do not get the deal and you feel VCs may be helpful long term: don’t disappear. Stay in contact and show your progress. If you stay on their mind and improve your metrics, they may even contact you at some point to invest. The average time to raise a series “A” round is around 12 months, which also makes obtaining VC funding a long term funding option that is not suited for every company. Despite the narrow focus of VCs and the challenges in getting this type of funding, it can an important element in the success of certain companies.

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If you are looking for funding, do not forget to check-up on government grants, loan guarantees and tax credits. The application process for these types of funds, while also time-consuming, is shorter; you won’t lose equity in your company; and best of all nothing prevents you from leveraging multiple types of funding.