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If small business owners want to secure investment from venture capitalists (VCs), they need to know the exact valuation of their business before entering into negotiations. Otherwise, they end up charging too much and investors don't want to participate, or they give away too much as a concession for financial support. You don't have to let any of these unfortunate scenarios happen to you.
Instead of guessing and hoping, you must be willing to negotiate based on honest and accurate information. Even if your company is very small or you are new to the business world, there is no need to be intimidated when working with venture capitalists. Understanding your company's strengths and how to address its weaknesses can take you a long way to success.
Choosing the right venture capital opportunities
An important negotiation tip is to make sure you choose to negotiate with the right people. In other words, be selective about your options. You don't want to send a mass email to lots of VCs hoping someone will show interest. If you do that and get answers, they might be trying to take advantage and think you're desperate. Instead, target only a handful of venture capitalists who are a good fit for your needs and have already helped companies like yours.
Research your venture capital options and the people who typically back companies like yours. Look for VCs that operate in your industry or focus on backing small businesses similar in size to yours. When you find the right people, negotiating with them becomes much easier because you understand each other and have more common interests and goals. Then you can both see the value of working together.
Related: 8 Key Factors VCs Consider When Evaluating Startup Opportunities
Venture Capital Options to Consider
If possible, it is important to consider more than one option or offer. It's not just the VCs you work with that matters, but also what they offer you. Getting extra money to grow your business is important, but there are other aspects of business development. There are many different ways a venture capitalist can add further and lasting value to your company.
If your company needs support in other areas, don't hesitate to ask. Some VCs may have connections, offer mentorship, or provide value beyond cash. Consider these options and see if they can help your business succeed. If they are better than just an influx of money, they might be suitable for your needs. Ideally, you can get cash and other perks, but that depends on the person you're working with and what they're willing to offer.
Focus on post-investment processes
Before entering into a venture capital deal, make sure you are clear about what decision-making processes will take place after the investment and what level of control you will retain. In other words, you only want to agree to work with a VC who buys and takes over your company if that's exactly what you're looking for. It is extremely important that your questions are answered in this area.
This is an area where you should negotiate carefully, as too many small business owners get caught up in the idea of making money to help their business and agree to terms that only benefit them in the short term. Some people need to read the contract carefully, or they may not be willing to ask for more because they fear losing the offer. That's up to you, so make sure you know what compromises you're making.
Remember that value is part of the equation
Although the financial support that venture capitalists can provide is very important, there is value beyond that capital. Working with the right venture capitalists opens up additional opportunities that can be even more significant than the money they invest. When negotiating with a VC, make sure you know what's important to you and why your company is worth investing in. This can help you get a “yes” from the right investor.