Have you ever wondered how a professional investor might look at your business or startup idea? Do you worry about losing money investing to grow your business? Well, it might be time to put on your venture capitalist hat.
A venture capitalist is an investor who focuses on startup companies and small businesses looking to expand. But they won’t be investing in your local bakery. These investors spend their time with companies they think can make it big. Think Facebook, Twitter, Uber and AirBnB.
But just because your business may not attract the eye of these unique investors doesn’t mean you can’t learn from them. Investing in unproven companies creates a lot of risk even if the business concept is sound. So, to protect their long-term returns, venture capitalists need to know how to pick the winners. And minimize their losses with the losers.
Here are five fundamental principles of venture capitalists that every Business Owner needs to consider.
#1 Know Where The Value Lies
For any business to be successful, there needs to be an edge. Yours may be branding, an incredibly high-quality product, an exclusive app or a new twist on convenience for customers. Venture capitalists are pros at identifying that edge. That’s the talent that lets them quickly see what customers will love about a business. And what potential buyers will pay for down the road.
Venture investors also know that unique does not equal value. Entrepreneurs often come up with ideas that are fantastic to them but make little sense to customers. Why? Because the ideas are so different from what they’re used to. Remember that the more unique a business idea is, the harder educating potential customers will be. And that can slow growth.
Find and define your value early on build your business around that crucial element. You’ll better focus your vision, prioritize investment dollars and market in a way that enables you to stand out from the crowd!
#2 Don’t Make Investments Emotional
Your business is your baby. But that doesn’t mean you keep throwing money at a bad idea regardless of performance. Focus investments in projects that will grow your long-term Cash Flow.
Venture capital investors put money into a business in strict stages. Not only are there multiple rounds of fundraising (Series A, Series B, etc.), there are also milestones of how the company can use the cash from each series of investment. This keeps money from being wasted on unprofitable ideas.
Too many Business Owners fall in love with a business idea and forget you can’t eat vision. When putting money into your business, have strict goals for what you want that investment to achieve. Then check in on progress before placing the next dollar in. If you aren’t on the path you expected, don’t be afraid to go back to the drawing board.
#3 Be Aware Of Your Competition
Hearing a business founder say, “my business doesn’t have any competition,” is a top red flag for venture capital investors. Every business has a competitor. And if it doesn’t, there’s a more significant problem!
Just because there isn’t a company out there who does exactly what you do, doesn’t mean you don’t have competition. Early Uber competed with traditional cab companies. Netflix competed with Blockbuster and cable companies. Your business competes with someone.
Ignoring the sources of competition in your market puts you at a disadvantage. Take the time to understand what substitutes your customer may be seeing. Are your prices too high? Does another business offer a feature that buyers are clamoring for?
Network with your peers and regularly review the market to see what is working for them. You’ll optimize your business faster leading to stronger growth.
#4 Put The Right People In Charge
You’re the founder of your business. That makes you incredibly valuable as a visionary. But being the creator of your business doesn’t mean you can be a jack-of-all-trades.
Venture capitalists understand better than anyone that the founder of a company may not be the best person for every job. One of the first steps a venture investor takes when investing in a new business is reviewing the senior staff. They can help a founder decide where they need to lean in. And where they would be better off taking a step back.
A brand new small business might not be ready to hire full-time employees. But if you’re realistic about your skill set, you’ll know how and when to ask for help. Recognize you can help your business grow more efficiently by delegating tasks that aren’t in your core competency to partners or contractors. And trust their advice. They may see something you don’t!
#5 Familiarize Yourself With The Exits
Just as no entrepreneur can run their business forever, no venture investor hopes to keep their ownership stake in a business for years to come. They want to make sure there are ways for them to cash out. Whether their plans for the company succeed or not. That’s why in Cash Flow Cure, we Start With The End In Mind.
Part of the due diligence process for any investor includes identifying potential exit strategies. They look at a variety of different options and look for comparable transactions in the market. This helps set valuation targets and ensure that investments in the business don’t outstrip the money they could realistically get back in a sale.
Always consider multiple exit avenues. If you’re building a Legacy Business, are there larger competitors who may want access to your customer base or niche? Would the business be attractive to another entrepreneur who wants to run a business without struggling through the early years of growth? If your business concept completely flops, do you have some innovative practice that you could sell or license?
Even if you’re planning a Profit Business, planning ahead is smart. Thinking forward to an exit allows you to identify risk. If you are investing large amounts in a business that has no potential buyers, you could lose everything if the company takes a negative turn. Or if an unexpected life event hits that makes it impossible for you to keep working.
Protect Yourself and your family by giving yourself options.
Grow Your Business Smarter and Faster
Entrepreneurs are visionaries. We fall in love with our ideas. We want to change the world. That’s the energy that gets us through the tough early months and years. But a successful business needs more than a passionate founder to succeed long-term.
When reviewing a business idea or growth investment, take the time to step back and think like a venture capitalist. It will help you pick the winners!
The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.
image credit: Bigstock/Bigedhar
Chelsea Brennan is a former Wall Street financial analyst and investment manager who changed gears in her career to chase her passion of improving financial literacy and independence. She is now a personal finance writer and content marketer. Chelsea shares her obsession with budgeting, investing, and raising financially smart kids at MamaFishSaves.com.