Think about your venture funding strategy in terms of risk and ask your team, “What can we do to lower risk?” Some of the things you may come up with might include securing patents; filling out the team; gaining traction through technology or product development; or establishing early sales.
Setting up strategic partnerships and other relationships are another way of reducing risk by partnering with companies and organizations that can help you break through barriers by using the systems that they have already set up.
Patents: Although patents can lower risk, whether you should pursue a patent isn’t so cut and dried. Patents are expensive and require a large investment of time. In some cases, you’re better off taking that time and money and just focusing on developing a big market and dominating it quickly.
Still, VCs look for companies with unfair market advantages. One way to achieve that unfair advantage is to lock up your technology or product with a suite of patents that cover key elements that will keep your competition at bay. Having quality patents in your hand can add value to your company and make it more fundable.
Team: The biggest risk VCs see in early-stage companies is with the team. Do team members have the necessary expertise? Do they know how to work together? Can they scale this company up to be really big?
To minimize this risk, create a staffing plan that projects out through your next few years of milestones — what kind of people do you need now? What kind of people are you going to need in the near future? — and start recruiting them now. Your company will have a more attractive risk profile if you’ve already found the people you will be moving ahead with.
Traction: Traction is a big word for VCs and refers to the extent to which you are able to get stuff done. The more traction you can get (demonstrated by your milestone achievements, especially in getting people to buy your product or service), the less risk your company has.
Think about the kinds of milestones you need to accomplish to develop traction: completing your product, launching your website, and clinching your first paying customers, for example. If you can accomplish these quickly, your company will have less risk for investors.
Relationships: Your ability to establish strategic relationships with other organizations is a way for you to grow your company fast and build influence based on the expertise of other organizations. Look for ways you can leverage strategic partnerships to cut costs, avoid getting distracted by work outside of your core competency, and gain access to markets and distribution channels, and more.
Even though you may pay a higher rate by going through distribution partners, for example, it is still worth is. Keep your eye on the primary objective at this point: getting going as fast as possible first. Later, after you’ve captured the market, you can look at improving your margins.