Approaching a venture capital fund for financing can be tricky choice. Here are six questions to help you making an informed decision.
Venture capitalists (VC) scout around the world looking for entrepreneurs with good business ideas that are likely to succeed. Here are a few things to consider if ever pitching your business idea to a venture capital fund manager.
1. Is it demand driven?
Ask yourself if your business service/product is driven by demand. In other words, will your business idea be able to make money? VC Fund managers only bet their money on businesses that hold a promise of being able to make sales, which translates into big profits.
2. Can your idea succeed in the long term?
Consider whether your business is sustainable for the future. For some sectors, like Information and Communication Technology (ICT), things change very fast. A mobile or internet innovation may appear to be a lucrative idea, until the product becomes obsolete with the invention of a more advanced application. Venture capitalists are willing to invest in businesses, but before they do, they want to be guaranteed that your business idea will not be outdone by someone else in the next few months.
3. Will it be open for expansion?
Can the idea be replicated in other countries? Fund managers look for businesses that can be scaled across Africa or other parts of the world. With the possibility of increased competition and growing regional integration, venture capitalists say businesses that can be operational in several countries are open to a wider market and promise more profits.
4. Are you a determined entrepreneur?
Venture capitalists look for ambitious and determined entrepreneurs who are passionate about their ideas. Pim de Wit, a representative from Africa Media Venture Fund, explains, “We prefer working with entrepreneurs who are stubborn enough to defend their business ideas but still open minded enough to listen, learn and incorporate our ideas.”
5. Have you projected its profitability?
Determine how long it will take for your business to become profitable. Remember, venture capitalists really invest to make profits. When pitching, show them how you intend to make a profit, and how you intend to double that profit with their added investment. You need to expressly pitch the appeal to work with you in business.
6. Do you know the future strategy?
Most venture capitalists plan to leave after about five years. When pitching, you need to map out an exit plan. Examine whether you think opportunities might arise through a sale to a big corporation or a sale of shares at the capital markets. Point it out to them that you expect the business idea to be attractive to foreign market too. This offers fund managers the opportunity to plan their future strategy.