How do I partner with a venture capitalist?

Venture capital is a potentially risky and potentially rewarding way to finance a start-up business that has significant growth potential.

In return for investing in your business, the funder receives a stake in your business and plays an active role. Venture capitalists are usually private investors, investment banks, and financial institutions that invest in multiple businesses at the same time.

Some focus solely on specific industries. Depending on the venture capitalist, funding starts at around R150 000 and can be in the form of either a lump sum or a series of funding rounds.

Which businesses attract venture capitalists?

Venture capitalists typically invest in innovative enterprises with the potential to disrupt their industry. These enterprises often have high start-up costs and may not yet be generating income or profit, making them a high risk.

The industries that typically attract venture capitalists include the fintech, ecommerce, healthcare, and renewable energy spaces, but businesses in other industries may also be attractive.

Is my business a good fit for venture capital?

If your business has the following traits, you may be a candidate for this type of investment:

There is limited access to traditional funding due to high start-up costs and a lack of collateral.

Funds are needed to grow the business.

There is potential to grow into a multi-billion-rand business.

You have a proven track record and a strong management team.

In addition, your entrepreneurial skills, vision, and drive are important to a venture capitalist.

The pros and cons of a venture capitalist partner

The investment made by a venture capitalist stretches far beyond money. They have a vested interest in the business’s success, so they will be active in its operation. This adds significant value, but there may also be a downside.

PROS AND CONS OF A VENTURE CAPITALIST PARTNER
PROS	CONS
Substantial funding allows you to rapidly expand your business.	You will lose some control over your business, as the funder will become your business partner.
Venture capitalists invest in a wide range of businesses, so offer expertise and strategic business advice outside your own experience.	There may be tension in the business if the venture capitalist has a different approach to the business or wants to take the business in a different direction.
By leveraging the funder’s strong network, you can gain access to new markets, new strategic partners, or even co-invest with other firms.	The funder may have stringent growth requirements and set specific targets tied to future funding. If you don’t achieve these targets, funding isn’t released or your ownership can be diluted due to a decrease in valuation.
A venture capitalist has a longer-term view on their investment, allowing you to focus on growth and innovation rather than feeling pressure to achieve short-term profits.	The funder may put their own financial interests over the success of the business.
It can add credibility to your business if a respected venture capitalist has invested in it.
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How does the venture capitalist make money?

Funding normally lasts from five to ten years, after which a venture capitalist expects a return on their investment.

These investors make money when the business is sold, merges with another business, raises capital, or lists through an Initial Public Offering (IPO) and they sell their shares.

This means that their goals may differ significantly from yours, particularly if you wanted to own and run your business indefinitely.

Must I repay venture capital?

Generally, venture capital is not a debt that needs to be repaid but rather an investment in your business. There is no guarantee that your business will thrive simply because venture capital is involved, and funders understand this. They know some of the businesses in which they invest will fail and are aware it is a high-risk investment.

If the business fails, the funder loses their money and you are not personally obliged to pay it back.

How do I pitch for venture capital funding?

Funding is in high demand and obtaining it is competitive. A venture capitalist will seldom invest in a good idea only; a successful pitch should include showing progress in the business, such as having customers, testimonials, and a working prototype. The funder will also carefully evaluate the management team, focusing on factors such as their business skills, industry experience, passion, and entrepreneurial experience.

Ask yourself the following questions when preparing your pitch:

• Does my product stand out in the market?
• Am I reaching a previously untapped market segment?
• Do I address a unique market need?
• Is my business model scalable to accommodate increased customers, transactions, or revenue?
• Can my management team understand and effectively meet the expectations of our customers and drive company growth?

Every business is unique, so even if it doesn’t fit the typical mould, you may still be able to obtain funding if the venture capitalist sees an opportunity