The best way to test the market demand for a business is with customers, and spending too much time with investors too early can be unproductive.
Like most things, it is unclear who, when, how much, what, and how often talks with venture capitalists about your startup. As a guiding principle, we believe that there is a difference between informal discussions with an individual venture capitalist and formal raising of capital with a VC firm. Of course, as an entrepreneur, you always sell, including potential investors. However, we think that there is a line between the socialization of your startup with one person and the formal presentation of your startup to the partnership of the company.
An early conversation with VC is a great way:
Listen to the opinion of another intelligent person. Venture capitalists hear numerous startup ideas, capitalize on pattern recognition, and share this knowledge.
Find out what is happening in the market and how your idea fits into this space. Many venture capitalists are closely monitoring specific industries and sub-sectors, and have been for some time. Primarily if an entrepreneur explores some unfamiliar territory, talking with venture capitalists can help entrepreneurs better understand the market.
Connect with people who can somehow improve your business. Venture capitalists spend much of their time communicating and interacting with various people within the startup ecosystem. Communication with the venture capitalist can lead to warm ideas about advisers, industry ties, other entrepreneurs who have worked on similar projects in the past, potential partners, etc. If the VC believes that the company has a promise at an early stage, they will want to help.
Get feedback on what time of investment is required for your idea. Many entrepreneurs, who found the company, do not fully understand some of the differences between the sources of capital, the consequences of raising funds from one of them, and when (or even if) in the life cycle of the company is suitable for venture capital. Holding one or two early discussions with venture capitalists can help clear up these scenarios.
Get important value milestones from an investor's point of view. Similarly, an experienced venture investor can share valuable thoughts on what achievements and traction points a startup must achieve before it becomes attractive to an institutional investor.
Establish relationships and evaluate suitability. Venture capitalists like to finance people they know, so if you can establish a real connection and dialogue with them before you start raising funds, this will help in this process. And more importantly, an entrepreneur can use informal conversations to understand if there is a match, either in the investment profile or in the intangible interpersonal dynamics.
Demonstrate your ability to perform. The best way to sell venture capital at startup is to tell them what you want to do and how you are going to do it, and then proceed with this plan. It is much better for an investor to "see a movie, not a picture" so that they can evaluate the capabilities. Early conversation allows the entrepreneur to set goals and benefit from their achievement. VCs deal with many startups, so they are well aware that plans and deadlines are always changing.
Generally speaking, there are invaluable advantages for informal conversations with venture capitalists before you raise funds. In the end, entrepreneurs must build a company. And venture investors are just one of many components that are important to communicate with in the early stages of a company's life cycle.
However, it is essential to understand that as soon as you present your idea to another person in the company, in addition to your primary contact, you officially raise funds. This situation means that your best foot should be ahead. At the moment, you are not looking for feedback and help, but rather an investment. And if you want to optimize the results of fundraising, you should talk to several sources of capital.