The journey of an entrepreneur starts with a simple idea. It is when this idea gets off the ground, that one needs capital, ie. the amount of money required to fuel the growth of the business. This is why a company might turn to an outside investor. These investors might be friends, families, acquaintances, angel investors, or even venture capitalists.
Startups tend to go with investors when they can because it is initially hard for them to get business loans. In order to grab the maximum number of investors, the more you contact, the better it is for you. Preferably, try to find investors with the best potential to fit your startup and your deal.
You may want to pursue various types of funding; one of them would definitely be venture capital, or "VC." It is vital to understand what a venture capitalist is. You might notice that this phrase is used interchangeably with "angel investment". But understand that they are not the same. Angel investors finance their own money, and venture capitalists (VCs) use other people’s funds to invest in companies. Usually, VC comes from corporations, insurance companies, and endowments.
If a venture capitalist invests in you, they expect your company to grow enough to make notable returns. Know that VCs are very selective and tend to choose businesses in the market doing business for at least 3-4 years. At this stage, your company should be well-established and still have a lot of room to grow. When you accept funds from a VC, it can be a case that you might have to give up some equity in your business. This article provides a complete guide that can help you get the perfect Venture capital funding for your company.
Venture Capital Funding
Before studying various ways of raising Venture Capital, let's first understand what Venture Funding is.
What is VC funding?
Venture Capital is a form of investment or financing in which the firms support early stage, small, and emerging startups. But these investments are not made blindly. The funding is made only for those companies that show high growth potential or are confident that it will cause high growth. Thus venture capital is a kind of private equity.
Now the primary purpose for these venture capital firms to invest in these early-stages companies is to gain equity shares or ownership stakes. And when such startups grow and gain market value or become a unicorn startup, these venture capital firms sell their equity to get high returns on their investment. Therefore the venture capital firms risk themselves by investing in such young startups.
Another noteworthy thing about venture capital firms is that they do not make long-term investments. These Venture capital firms wait till these startups or early-stage companies get up to a certain size and market credibility. Once such startups gain a considerable market value, the venture capital sells their equity shares to large corporations and makes profits. So the basic plan of a venture capital firm is to invest in an entrepreneurial idea, then nurture the concept for some time, and leave it at some profitable stage. There are three types of VC funds:
1. Early Stage Financing
Because of the complex business nature, the initial stage is divided into startup financing, seed financing, and first-stage financing. The first set of money is given by seed financing to the company's founder to discover their startup. Next, Startup financing is when funds are provided for the development of products and services. The moment a startup aims to expand its business, it requires funding first-stage.
2. Expansion Financing
The next one on the list is expansion financing. The second stage is once the startup has utilized its seed funding and demands funds for expansion and marketing. Expansion financing also involves bridge financing; it is the funds that a startup requires for an IPO (Initial Public Offering).
3. Acquisition or Buyout Financing
When a firm requires funds to acquire another company or parts of a company, it is known as acquisition financing. A buyout financing is when a company seeks to purchase another particular product of the company.
PROS of VC funding
- Large sums of capital that don’t need to be repaid directly
- More exposure.
- Valuable network and connections.
- Business expertise and advice.
- More opportunities
CONS Of VC funding
- Diluted Equity
- Management fees
- Loss of Control
- Mismatched interests
- Pressure to grow fast
How does VC Funding work?
Venture Capital Industry Works with four leading players, they are :
- Entrepreneurs needing funds;
- Investors wanting high returns;
- Investment bankers needing companies to sell, and
- The venture capitalists, who produce money by making a market for the above three players.
The basic deal structure varies with different VC fundraising styles. There are many variations of the basic deal structure in VC fundraising styles. Still, irrespective of the specifics, the deal's logic doesn't change in providing investors the venture capital funds sufficient downside protection and a favorable position for added investment if the company proves to be a winner.
It is believed that VC firms tend to invest in great ideas. In reality, it all comes down to firms that do well, irrespective of the existing competition. VC firms concentrate on the central part of the traditional industry S-curve. In the early stages, when the technology is not perfect, they stay away from investing. Not only this, but they also stay away from later stages when competitive phases arise, and the rate of growth slows down without making much change. The adolescent period of accelerating growth is characterized by high growth as compared to the company's initial growth phase.
A company’s goal is to jump ahead of all other companies. Initially, almost all startups will have their growth curves and financial performance, which is almost the same for everyone. It becomes a significant challenge for a company, but is mandatory for a startup. At the initial stage, companies are trying to deliver their best through their products to a market that has displayed a need for that particular product. At this stage, the VC can identify management that can successfully execute tasks to meet market demand.
What to Consider Before Raising VC Funding?
Before raising any VC funding, you must get answers to the following questions every startup founder should ask before going for raising VC funding.
- What is the current size of the organization?
- Should I consider venture debt?
- When should I raise venture debt?
- When should I avoid venture debt?
- What’s the best way to run a venture-debt fundraising process?
Deeply analyze, research, and get the answers to the questions mentioned above, then only you can get the best results.
Best Ways to Get VC Funding
The following is a detailed description of how one should look for venture capital.
1. Start with research
Research is the core of everything. It is one of the major steps for you when you are working to find the best investors. You must understand who you are communicating with when it comes to business. Know who you are willing to make the investors like you want your friends or family members to invest in your company or are you searching for Angel Investors or Venture capital funding. Whoever you want to join as your investor, it is recommended not to discuss the investment directly. Rather, explain to them what is the idea behind your startup and observe their interest. This is one thing that can save your time convincing the investor who does not understand your opinion.
2. Connect with right VC's
You must connect with the right VCs. VCs differ in terms of size and specialization. There are some who can offer your startup hundreds and thousands of dollars, whereas others invest in millions. Similarly, there are some investors who prefer to invest in small companies and others who are more interested in bigger enterprises. The National Venture Capital Association, a VC organization, lists the potential investors on their websites. This will help and give you a good starting point to choose your targets. Another thing helpful for such events can be networking. The chances of you receiving the funding in your field can introduce you to a VC directly, but in some cases, cold calling can also work. Know the golden rules:
- Do not send a generic email to a VC.
- Take time to craft your opening message.
- Explain why you have approached them, give them a brief overview of your business goals, and make it easy for them to get in touch with you. Provide all your contact details.
- Most important of all, be direct and honest.
3. Send an elevator pitch
It would help if you have prepared an elevator pitch, a comprehensive pitch deck, and detailed financial projections. There are a number of VCs that are willing to invest in a relatively new company. Still, in many cases, a minimum viable product (MVP) will be required, a customer base and a strong established team committed to the success of the project.
4. Include a short intro video
Nowadays people do not want to spend time reading detailed projections. You might put together an excellent quick video or one-page pitch, and send that as the follow-on email when you talk with an angel or get an introduction. Expect the accurate information exchange to happen in email. The expected follow-up can be a great video that works better than an email summary.
Ensure that it is secured. A simple password-protected system can help. It can be risky to use the YouTube email-based permission as everyone has a large number of email addresses. The confusion is likely in this case. Approach this step only if you can make it seamless.
5. Be ready with a business plan
It is assumed that the business plan that your company serves is the screenplay; the pitch delivered is the movie. Don't make the business plan too big or formal because it will not last and should never be older than two to four weeks. VC may even reject your plan without even reading it. Businesses get money once they get through the due diligence phase of the selection process.
There are certain exceptions, but that is when a well-known successful entrepreneur takes a new business to angels. Angels do compete for those deals. In case a template is needed to help you get started, Bplans offers a free, downloadable business plan template.
6. Hire experts
It is important that getting a VC is a huge undertaking and can act as a turning point for your business. It is important that you hire legal and financial advisors who can guide you through the process. Experienced professionals don't come cheap, but having the right people on your side will prevent you from making common rookie mistakes and assist you to secure a good deal.
7. Prepare your pitch deck
A pitch deck is nothing but a business plan or an executive summary that is spread across 10 to 20 slides in a PowerPoint document. Investors prefer pitch decks because they force you, the founder, to be brief and use visuals instead of an endless list of bullet points. The pitch deck can act as the trusted ally in the pitch process. You will use it as your main collateral item to get meetings, it will be the focal point of your appointments, and it will be what investors pursue after sessions.
8. Be prepared for the presentation
It is important that once you are done with the pitch you are also prepared for the presentation. The goal should be to find an aspect of the business that the investor cares about and zero in on that point. Note that in case the investor wants to spend 60 minutes talking about the first slide, you shouldn't rush them. Ensure that you focus on the conversation and reply to what investors asks.
9. Do your due diligence
Prior to funding your business, a VC will conduct a thorough background check on your startup. This phase is known as "due diligence". However, this is a process that should go both ways. It is not necessary that you have to accept the first offer you get. Do a bit of research from your end. Once you receive any offer ask, and confirm questions to yourself about the firm. These can be whether the firm has a good reputation or their previous track record of helping startups grow. All this will assist you to get the best investors for your startup.
10. Have a follow-up plan and deadline
Lastly, have patience. Don't anticipate a decision overnight or even within a few days or weeks. Sometimes, it can even take a month or a year to hold the deal. Do not put your life or business plans on hold. It is advisable to set a deadline and be willing to walk away whenever you feel like it is not worth it. You might hear a lot of no’s before getting the funds you need. But, patience is the key here.
Conclusion
Overall, you are going to face a lot of hurdles during this phase. It is advisable to be strong and continue your hunt for the best investors. Eventually, you will get VC funding that will fulfill all your requirements.