Anna Emanuelsson
Business Coach - Financing & Investments
0705-14 78 56
Capital in exchange for equity
Venture capital is an investment in a company in exchange for a share of ownership, influence, and/or future returns. Venture capital investments are often made in newly established incorporated companies with high potential and high risk that have a significant need for financing to reach the next level in the development of the company.
Advantages
One advantage of venture capital is, of course, that you receive resources to invest in your company, providing conditions for faster development. If you carefully choose a venture capitalist, you can also gain new skills and contacts that can help you develop the company.
Disadvantages
A disadvantage of bringing in an external investor is that you have reduced influence in your company since you are giving away shares. Venture capitalists often demand rapid growth, which typically comes with requirements for extensive and regular reporting on the development of the business.
You should also consider where the venture capital funds come from and ensure that the values of the company and your personal values align with those of the venture capitalist. This is crucial for the relationship to be long-term. If you have a values-driven company that strongly communicates its values, there are also risks in accepting capital from an investor whose values contradict yours.
Considerations before venture capital
What do you want?
It can be tempting to accept an investors proposal immediately just to get the business rolling and start making money or receiving a salary. Taking on venture capital is a lengthy process and not something you should rush – once you've accepted an investment, there's no turning back. Consider whether you truly want to give away a part of your company, if the timing is right, if the new owner is right, discuss with acquaintances, business coaches, or contact a professional advisor.
Timing
If you've decided to take on venture capital, wait as long as possible before doing so. Try to get profitability going, increase market presence, and thereby create opportunities for a higher company valuation and better negotiation leverage.
Pitch
When contacting an investor, it's crucial to be well-prepared. To convince an investor to invest in you and your company, you must show that there is a market for your product/service (traction), that there is a sharp team that can execute, that there is sales competence, and that you are a leader with a significant skin in the game and has all the potential to develop the company to a long-term sustainable business.
Smart money
Many who take on venture capital solely focus on the amount of money entering the business and forget that the investor's expertise is equally valuable. The network and the chemistry between you as individuals are also important to consider.
Company valuation
Company valuation is amongst the hardest things to achieve, especially in a startup. In an early stage it is not great to overvalue the business, and you should be aware of how much of the company is reasonable to give away. Consider that you will probably take in further rounds ahead and make sure that you as a founder do not loose to much of your shareholdes to early. Seek help and ensure that all legal aspects are handled correctly.
5 tips if you consider venture capital
1. Be well-prepared
Thoroughly consider your business goals, vision, capital needs, and how the funds will be utilized. Clearly articulate what you seek beyond capital.
2. Showcase your team
Highlight your team's key strengths and complementary skills. Convey why your team is essential for the company's success.
3. Demonstrate profitability
Focus on presenting your business model, revenue streams, and plans for achieving profitability. Provide realistic market size scenarios and break-even calculations.
4. Include sustainability
Highlight how your company contributes positively to global challenges, aligning with sustainability goals such as Agenda 2030.
5. Be aware of the challenges
Understand that obtaining external capital is a challenging process. Expect multiple presentations, rejections, and continue refining your pitch based on feedback. Rejections do not necessarily reflect a flawed business idea, but rather a mismatch with the investor or timing. Use feedback for improvement and approach other investors.
Questions?
Anna is here to help you out!