Raising money for your business can be a challenge. In fact, financing is one of the biggest challenges that entrepreneurs just starting out face. Many struggle to find the capital they need to get their business off the ground.
Traditional funding opportunities, like getting a loan, aren’t the right option for everyone, but that’s where an alternative financing route like venture capital comes in.
Unlike other funding options, like angel investors, venture capital firms tend to have larger checks to hand out. A multi-million dollar check usually means funding a start-up for a longer period of time, giving them a better chance to really get off the ground.
Getting your hands on one of them isn’t always the easiest feat, but it is possible. In this article, we’ll cover what you need to know in order to boost your chances of securing venture capital.
What is venture capital?
Venture capital, often referred to as “startup capital,” is money invested in young, unproven companies with the intended purpose of helping them grow into successful, established firms.
These emerging companies are picked to receive capital because they have high growth potential. While the initial investment is risky, there’s a massive potential for return. Unlike a lot of investments where you might make thousands back, a high potential company could return millions if everything works out as intended.
This private equity financing is provided by venture capital firms. These firms are primarily made up of successful business people. Their money often comes from investment banks, other financial institutions, and even individual investors. These firms then gamble on businesses that have a high potential of turning their original fortune into a much larger one.
Preparing to raise venture capital
Raising venture capital isn’t the kind of scenario where you simply walk into the room and ask for money.
A lot of preparation and money goes into putting together pitch documents and presentations that will help venture capital investors understand a business’ potential. Many young companies are looking for this funding, so the landscape tends to be quite competitive.
If you’re considering seeking venture capital funding, now is the time to start preparing. Here are the steps you need to take to get off the ground:
1. Get to know venture capital terms
Language is a vital part of communication. Like other industries, venture capital has their own terminology and jargon you’ll need to learn if you’re going to seek funding.
It’s important that you understand terms like:
- Rounds: series of investment transactions where venture capital is provided to a startup in exchange for equity.
- Valuation: the amount an investor is willing to pay for a company’s equity.
- Percentage: a measure of how much a venture capitalist owns of a startup.
Without understanding industry-specific terms, you could struggle to accurately communicate what you’re looking for. Likewise, you might not know what’s going on or the next step you need to take.
Getting to know the process and the language is important.
2. Assess your business
Venture capital is not right for every business. Even when it’s right for your startup, there are a lot of i’s to dot and t’s to cross before you’re ready to actually ask for that cold, hard cash.
If you want your company to be considered for venture capital, you need to be able to demonstrate true growth potential. This doesn’t necessarily mean you need to show that growth right now, but there needs to be a clear future path to it.
Young companies that seek this kind of funding are also usually looking for a large chunk of change. If you only need $1,000, $10,000, or even $100,000 in investment, venture capital is not for you. Likewise, not all venture capital firms are looking for the same thing. Different firms have different fund sizes to distribute, so it’s important you carefully choose who you pitch to.
But picking your target firm is only one step of the process. You also need to be able to pitch your story and history in a compelling way. And you need to have a solid team of talent (including yourself) that you can pitch in a few quick sentences.
Before you get started, you need to be ready to communicate with investors. You’ll need to tell them how you’re different from competitors, what you have that no one else does, and how you plan on achieving the massive growth they seek. If you’re not ready to share this information, you’re not ready to start pitching venture capital firms.
3. Prepare the right documents
You can’t walk into a room full of potential investors and simply ask for a bunch of money. There are a few things you’ll want to prepare in advance to give your startup the best chance for success. These documents include
You’ll want to spend time perfecting these documents, instead of just throwing them together. For many startups, this means hiring a professional pitch deck writer, or getting help to pen a compelling business plan.
They say it takes money to make money, and that’s very true in the world of venture capital. If you’re looking to raise money, make sure you’re ready to present your case in a professional and convincing way.
4. Build a core team
It would be highly unusual for a venture capital firm to cut a massive check to a solopreneur working on their startup alone. While nothing’s impossible, these types of investors are really looking to throw their (financial) weight behind a solid team. A great idea doesn’t go anywhere without talent to back it up.
You’ll want to put together an impactful team that can truly take the business to the next level, pending you get the cash. Get ready to clearly articulate your team’s background and experience to potential investors, and let them know what your team brings to the table that other companies are missing.
5. Build a team of advisors
A good team doesn’t start and end with your core individuals; advisors can also make a significant impact on a startup.
Potential investors like to see that you’ve surrounded yourself with an experienced team of individuals familiar with venture capital funding. This helps show them that you have somewhere solid to go to ask questions, get direction, and seek advice if you get stuck or simply need help making decisions.
A team of advisors should be diverse in experience and expertise. Including professionals like lawyers, accountants, and even investors can help show your solid backing. They can also provide invaluable advice to help take your company to the next level.
6. Create a target list of investors
Seeking venture capital isn’t necessarily a numbers game.
While you do probably want to pitch to more than one firm, pitching everyone is a lot of work and not very professional. Pitching the wrong companies tells investors that you didn’t take the time to properly research and learn about what they’re looking for––which isn’t exactly going to entice them to lend you cash.
Make a list and break it down by:
- investment stage
- industry sector
- geographic proximity
- comparable portfolio companies
- amount you need to raise
- potential investor contacts
Make sure you do adequate research on any firm you’re considering asking for venture money before you approach them. You want to know as much as you can.
7. Practice your pitch
Don’t go into a pitch meeting unprepared. It won’t make you and your startup appealing to prospective investors, and you’ll probably come out of it feeling pretty bad.
You want to find a small audience of people you trust (like your advisors) with at least one person who is familiar with getting venture capital, and practice your pitch for them. They can help point out flaws, gaps, and weaknesses in your presentation. They should also pose questions before prospective investors ask them.
You’ll want to prepare a 30-second, three-minute, and 15-minute version. That way you’re prepared for anything.
8. Understand the process
Venture capital funding is a full-on process. Unlike other methods of funding where you might walk in, make your pitch, and get an answer based on that, there are a few more steps involved.
There are five primary stages in the venture capital process:
- Seed stage
- Post-seed or pre-third stage
- Third stage (Series A)
- Fourth stage (Series B)
- Pre-initial public offering (IPO)
Understanding where you are in the process, and what the next step is will be crucial in your success during the venture capital process.
9. Understand term sheets and due diligence
There are many things to be aware of during the venture capital process. However, two important ones you want to understand include term sheets and due diligence.
Term sheets outline the basic terms and conditions under which an investment will be made. They are nonbinding agreements, but are crucial to attracting prospective investors, and giving them a more complete idea of what you’re looking for (and what you’re willing to give up for it).
Due diligence, on the other hand, is done by venture capital firms evaluating a startup. It’s a rigorous process where they evaluate various business and legal aspects of an opportunity (or company), which helps them determine whether or not it’s a good investment for them.
Knowing what these are and how they work can go a long way towards making the venture capital process easier for you to understand.
Is getting venture capital hard?
Having a great business idea is the easy part; it’s the execution that’s the real challenge.
Only two to three per cent of those with ideas for businesses actually make them happen. The chances of getting your hands on venture capital money is even more slim, with fewer than one per cent of companies that seek it actually securing it.
So, yes, getting venture capital for your startup is challenging.
Even still, quality startups with massive growth potential do get their hands on venture funds, so it’s impossible. You want to be sure that it’s the right funding source for your business. Furthermore, you want to make sure you take the time to put together all the information you need, and that you’re presenting it to the right firm.
Putting serious effort into the process can make your chances a little bit better.
When to raise venture capital and when to skip it?
Venture capital firms look for big projects, which means that not every small business or start-up is right for the funding. In particular, most firms are looking for companies that are:
- Big (as in B-I-G) potential
- Massively scalable
- Led by a strong team
- Based on something unique
- Able to go public within the next five to 10 years (the money won’t last forever)
If these descriptions don’t match your business, it’s probably not the right target for venture firms. But that doesn’t mean all is lost.
What should I do if my startup is not right for venture capital?
Venture capital funds are not the only source of funding available out there for start-ups and small businesses. There are other ways to fund your business.
- Grants and government funding programs
- Non venture capital investors, like an angel investor
- Loans and business credit
Not every business is the same. Creating a solid business plan and determining the best financial model for your specific idea will help determine where you should seek funding from, if you need it.
Ready to make your business official?
Raising funds for your business is never really “easy,” but it is doable. If venture capital is the right option for your business, with some elbow grease and knowledge, you might be well on your way to getting what you need.
However, venture capital isn’t the only funding option available to startup firms. If it’s not the right option for you, take a look around and see what might be. Chances are, there is a right method for you.
If you’re seeking funding of any kind, you’ll likely need to have a formal registered business (instead of a sole proprietorship). For those who haven’t gotten officially set up yet, Ownr is here to help. The process is easy, quick, and you can do it from the comfort of your home.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.