This is a series of step-by-step guiding on how to approach Venture Capitalists with focus on Silicon Valley. It is directed towards early-stage technology ventures considering equity financing. This post is partially based on an interview with Johan Brenner, General Partner at the Swedish Venture Capital firm Creandum, based in Silicon Valley. This first post will be an introduction to Silicon Valley, Venture Capital and why you should be here.
There are commonly three major categories of start up financing:
● Finance without external help (bootstrapping)
● Borrowing the money or government grants (debt)
● Issuing stock (equity).
Venture Capital or VC financing falls under the latter. VC financing has been around for decades and is primarily associated with technology investments. The investments are generally concerned with taking on higher risk and yielding higher returns. There are various types of VC financing fitting venture needs in different stages of development (seed, A-B-C rounds, etc.).
A common misconception on VC funding is that it’s only about the idea or technology. That’s necessarily not true. While a good idea can be sufficient to get the attention of VC:s, it has to be complemented with a great team. In fact, it is better to back a great team with a poor idea rather than vice versa. VC’s get a lot of proposals to invest, but very few get investments.
To quote Johan: “We get over 1,000 companies that reach out to us every year. We meet 300 and invest in approximately 3-5”.
Hence, VC´s core challenge is to find both ideas and teams that are going to hit big with disruptive potential. Over 50% of all investments will not work thus a small percentile will have to make up for all failures. Your challenge is to find a VC that understand, resonates and will be able to help you realize your vision.
It is important to understand that VC financing is a service business, not just money. You should carefully select the firm and person that you think best can help you. If your needs are pure capital then you might be better off with crowdfunding or other financial options. Perhaps your venture needs financing but isn’t mature enough to get VC financing. Business incubators or angel investors are great alternatives. They can provide you with networks, help and commonly some limited financing.
Two reasons for Silicon Valley
Let’s assume that you have a next brilliant product with great timing and a super team to back it. All the prerequisites to hit big. For some firms it will make sense to go to Silicon Valley for financing and scaling at some point, but not for all. It is very likely you want to come to the US and perhaps Silicon Valley if your company specializes in selling software to enterprises. The same goes for some consumer products, since you need close access to super talent and platforms for partnerships. The other step is to acquire knowledge to scale your businesses.
When you have grown your company and established a core team (with solid engineering, product and sales) and feel the need to expand your business further. Then you can find star-talent that will be able to scale the business in Silicon Valley. From 50 to 10.000.
Few if any US investors will engage in Nordic companies for seed or A-rounds that does not have the headquarter and the main team in Silicon Valley.
If you are very early stage: Try to get inspiration and angel funding in Silicon Valley and apply for the accelerators or incubators in the area. If you have launched, got customers and traction, then it may be right to get US VCs to fund you, but in most cases you may have to move the management team to US.
So, get over here, join the ecosystem and start networking. Find the knowledge and VCs!
Silicon Valley has long dominated the worldwide scene of disruptive technology innovation. Hosting headquarters for most of the notable tech companies including Facebook, Apple, Google, Oracle and Intel. Being a worldwide poster-child for successful technology and continuous innovation naturally attracts a lot of ideas and venture capitalists.
It might not come as a surprise that 2014 proved to be the strongest year for venture capital funding since the bubble in 2001. According to CNB the total U.S venture funding exceeded $47 billion. The Bay Area and Silicon Valley accounted for nearly half, $23 billion.