Starting a new business is an exciting venture, but just because you’re excited about your new idea doesn’t mean investors necessarily will be. It’s actually harder for new startups to raise capital today than it was a decade ago, with new startups having to prove they’ll generate revenue before they’ll ever attract investors.
So how do you know if your idea can raise venture capital? Here are a few questions that should help you make the decision of whether to spend time raising investment funds.
Is Your Idea Worth the Risk?
The first item to ask yourself is if your idea is really worth the risk. In other words, if venture capitalists were to invest in your idea, would it have the potential to compensate them several times the amount they invested?
The amount of return you hope to generate is an important consideration because investors know that the majority of their investments won’t yield a return. If you can prove that your idea generates revenue—enough to net them a profit while covering losses elsewhere—you’ll stand a better chance raising capital to fund your project.
Are You Dreaming Big?
In connection with the level of risk involved in your idea, you’ll also need to be aiming for a large scale profit—not just millions or tens of millions, but hundreds of millions.
The reason for this is again due to the fact that most of an investors’ investments will likely fail. Because of that, shooting for one or two million isn’t going to cut it—think in terms of tens to hundreds of millions. That way, the return will be enough to cover the initial capital provided by your investors as well as help cover any losses they suffer from their other investments.
How Will Your Business Be Structured?
The next matter is one of business structure, particularly with respect to having a board of directors. The key here is accountability—if your investors can hold you accountable, they’ll be more likely to be on board with your idea.
This ultimately means their desires will frequently become your commands. While you might be content to grow at a leisurely pace, they might push you to grow faster than your competition, which may or may not be in your best interest. Before seeking venture capital, consider whether you can meet those kinds of demands.
Do You Even Need Capital?
While it may seem like a great idea to get a multimillion dollar infusion into your business, it does come with its associated risks. As such, the most important question you can ask is whether you’ll actually need that capital.
If your idea requires a great deal of funding to get off the ground, it may be necessary, especially if you hope to sell the company or go public within the next decade. However, if you’d be able to get that funding by other means—or if you simply don’t need it—venture capital may not be the right route for you.
Making the Decision, Navigating the Process
The process of raising venture capital can be quite complex, and you’ll have both legal regulations and the interests of your potential investors to contend with. A corporate attorney—like us at Hart David Carson LLP—can help you navigate that process successfully.