How do you turn your idea into a viable business?
Maybe you’re the owner of a successful business who’s interested in expanding, and you need funding to reach new customers and markets.
You’ve worked as a subject matter expert in a specific industry for 20 years. You’ve got a list of ideas and operational efficiencies that your peers didn’t take seriously, and now you’re thinking you’ll turn your insights into the next billion-dollar company. You know what steps to take to build the product, but you’re not 100 percent sure how to turn your idea into a viable business.
Or maybe you’re the owner of a successful business who’s interested in expanding, and you need funding to reach new customers and markets.
Whichever camp you fall into, you know that it’s smarter to use someone else’s money. You also know that funding exists through entities like venture capital firms. As of Q3 2020, Canada’s startup ecosystem received $3.5 billion CAD in venture capital funding. South of the border, the startup ecosystem benefited from $156.2 billion US of VC funding.
But before diving headfirst into pitch decks and back-to-back networking events, it’s worth asking:
Am I even a venture-backable business?
It’s a question worth asking, because a curious thing has happened around how entrepreneurs and the general public perceive venture capital.
Originally, venture capital was viewed as a means to an end. It was a funding source that filled a void when companies were too risky or too unfamiliar to secure funding from a bank.
Today, the solitary act of securing venture funding has become an aspirational goal. So much so that a certain sentiment exists among aspiring entrepreneurs: If you want to start and grow a business, you need venture funding.
Not true, according to Alex Gold, Managing Partner at Harvest Ventures. You could have a strong business and exemplary unit economics and still be an unattractive candidate for VC funding. On the other hand, another company offering a similar product and service might receive tens of millions of dollars in funding, because they’re viewed as a venture-backable business.
So how do you know whether you’re a venture-backable business?
A venture-backable business has the potential to produce the kind of outsized returns – up to 100 times – that investors seek. VCs invest in a portfolio of new, risky businesses, so each business has to have the chance of disrupting a multi-billion-dollar industry and generating $100 million in annual revenue to make up for the other, unsuccessful portfolio investments.
A good way of thinking about this is what New Enterprise Associates (NEA) calls the “Ben rule” after Partner Ben Narasin: “if your investment cannot return over half the size of the investor’s entire fund, then they may not be right to pitch.”
“For venture backable businesses, scale matters,” explains Gold. “They need to have scale potential from day one to achieve exponential growth. If they don’t have scale potential from day one – call this accretive ‘network effects’ – it’s hard to achieve outsized reward and incentivize venture investors to take the plunge.”
With this in mind, your status as a venture-backable business comes down to three main things:
Is your business a failure if you don’t have these things? Not at all. Many successful businesses aren’t meant to rapidly scale or disrupt industries. Instead, they are extraordinarily successful businesses built to potentially make millions of dollars for the founders directly.
“It’s critical that founders build the business that they want to build,” advises Gold. “Do not try to build a venture backable business just because you think it's the only method to grow and scale a successful company. Nothing can be further from the truth as only about two to three percent of businesses in existence have or will ever raise venture capital.”
If you’re a founder seeking funding, it’s important to identify:
Once you’ve established that you are, you can move on to identifying the kind of funding you need.