IOM Advisory interview:

How successful venture capital fundraising works: 5 facts


Feb. 3, 2021

Our partner Thomas Labryga was invited by the international tax and accounting firm ECOVIS to share his experience on successful venture capital fundraising.

How successful venture capital fundraising works: 5 facts by Thomas Labryga

Finding investors through successful fundraising is elementary for startups. The expert Thomas Labryga explains how successful venture capital fundraising works.

Of course, there are many different factors that influence successful venture capital fundraising. But if founders are aware of the following five facts about successful venture capital fundraising, they are on the right track.

1. Investors invest primarily in the team

A strong team is the decisive factor for VC investors even before the business model or the key financial figures. This is because investors anticipate that the business idea is likely to change over time or even be completely discarded ("pivot"). An "A team" will always find new ways to succeed. A "C-team," on the other hand, is unlikely to develop even the best business idea properly. In addition to experience and a good track record of the founders, the composition and individual skills of the founders are important: Are all relevant areas such as technology, commercial and operational know-how satisfactorily filled? Are the team dynamics and motivation right? In addition, the "personal fit" between the investor and the founding team is crucial. In the best case, the investment starts a long-lasting partnership with a lot of synergy potential. Personal compatibility is important, especially to get through difficult phases.

2. Innovative idea meets a differentiable business model

A good idea does not guarantee growth financing, but it is still essential in the first step that the idea is original and innovative, fills a large gap in the market or has the potential for significant change (disruption). It is also important that the idea is "defensible": is there essential intellectual property (IP), network effects, economies of scale, or brand loyalty that could secure the start-up a strong market position with sustained strong returns in the future? In short, investors need to believe that the investment is worth the risk.

3. Correct timing is crucial

The right timing is one of the most important indicators for the success of startups. The Palm Pilot, for example, was the first tablet in 1996 - ten years before the first smartphones. SiXDegrees was the first social network in 1997 - long before the market was ready for it (Facebook was not founded until 2004). On the other hand, AirBnB or Uber started at the perfect time. A certain level of technological maturity and proliferation of Internet business models coincided with an economic recession in which additional revenue was highly welcome.

4. Scalability with positive return outlook

The business of VC investors is to take high risks for high profit opportunities. A few investments must overcompensate for unsuccessful investments. Therefore, two parameters are essential for any investment:

  • the business model must at least have the potential for exponential growth, i.e. the market must be large enough or growing strongly enough, and
  • the company must have a potential for high profitability.

It is not a problem or even welcome if the start-up "burns" money in the growth phase. However, the business model should be inherently profitable and the "unit economics" must be right. That is, the direct revenues and expenses associated with the core of a particular business model should be profitable.

5. Investors like it simple and professional

Investment decisions as well as business set-up are highly complex and challenging. Therefore, a clean essay of the company, a clear and consistent financing strategy, high transparency as well as a structuring of the financing round and the contractual framework that is as far as possible in line with the market are important to create trust and to signal professionalism.

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