Startups and venture capitalists are so closely linked in the tech world that it can be hard to think about one without the other.
We certainly wouldn't have our tech giants, like Facebook or Twitter or basically any other startup-gone-big you can think of without VCs. But, finding and getting venture capital for your startup can be daunting. Where do you start? How do you start?
Don't fret — we've got you. Keep reading for more information on how to get venture capital funds for your startup.
Before we dive in, let's make sure we understand a few terms:
VC funding is the process in which a company or individual invests money into a business in exchange for equity. This type of investment is most commonly used by startups and small businesses because it can give them access to more resources that they may not otherwise have.
Venture capital firms are organizations that invest money into new businesses in hopes of making a profit. They do this by investing in startups and then helping them grow into successful companies.
Venture capital firms make money by selling their shares in the company or receiving dividends from profits made by the business.
Getting venture capital funding allows you to grow your business faster than you could on your own.
The investment gives your startup access to resources like human capital and expertise that can help you launch more quickly, develop new products, expand internationally, or all three at once (which is why most startups hope to get VC funding).
Now, let's get started. Here's how to find and get venture capital for your startup.
While it might seem like the more VCs you contact, the higher the chances of investment are, that's the wrong approach. You shouldn't try to contact as many people as possible. Instead, try to find venture capital firms that are the best possible fit for your startup and your deal.
The more closely aligned your startup and you, as the founder, are with the needs of the venture firm, the more likely you'll find venture capital firms willing to write you a check.
What other companies have they invested in? Are those companies similar or different to your startup? Have they invested in a direct competitor?
What stage of funding do they like to do? If they're primarily interested in Series A, you shouldn't be going to them for seed funding.
Is your company really a startup — or is it a small business? VCs are interested in exponential growth. If that's not what you're offering, it may be a good idea to consider other funding sources.
Does your long-term vision for your startup match the long-term vision of the VC? For example, some may be looking for a quick exit, while others are more interested in building value over time. Take a look at their prior exits to give you an idea of what you're potentially getting into.
The first step to finding venture capital is to make a smart introduction to the venture capital firm you're interested in meeting. Venture capitalists rely heavily on trusted connections to vet deals.
While some VCs will take pitches from an unsolicited source, it's best bet to find an introduction through a credible reference.
Every pitch to a venture capital firm starts with an introduction to someone at the firm. It helps to know the exact profile of a venture capitalist to know which level of introduction makes sense. Typically it starts with an introduction to an associate and then you can work your way up to the full partnership.
But, if you can't find any connections? Your next best alternative is to make the warmest possible introduction. You're looking for any connection you can make to the venture capitalist so that you can demonstrate you've done your homework and you're not just sending out form letters. Look for any background you can find on what previous deals they may have done that relate to your pitch. Look for some recent press that they may have gotten that you can refer to.
You just need to create a little bit of warmth and personality to what is otherwise a cold intro. Showing that you've already done some of the homework will go a long way toward making sure you don't wind up in the “deleted” folder.
Luckily for you, most VC firms have a documented process founders should follow in order to guide their approach.
The first thing a founder needs to send to angel investors is an elevator pitch via email. The elevator pitch isn't a sales pitch. It's a short, well-crafted explanation of the problem a startup solves, how they solve it, and how big of a market there is for that solution. That's it.
You don't need to “sell” the angel investor in the introduction. The opportunity should speak for itself.
For more information on email pitches, read “How to Create the Perfect Email Pitch.”
Sending an elevator pitch along with a 20-megabyte PDF document is a surefire way to never even make it past an investor's spam filters. Instead, send a link to your pitch profile, which is an online profile that explains a little bit about the deal and provides a way for the investor to request more information.
You can create a funding profile on Fundable.com. It's quick to do and is an easier way to provide a reference back to a company profile than messing with attachments.
Investors may also ask for an executive summary but, over the past decade, this has become less and less common, with most preferring a pitch deck. Regardless, it's a good idea to have one prepared — just in case.
The executive summary is a two to three-page synopsis of your business plan that covers things like the problem, solution, market size, competition, management team and financials of your startup. It's typically in narrative format and includes a paragraph or two about each section. You can expect the angel investor to jump to the one section they're most concerned about, read a couple paragraphs, and then maybe look a little deeper.
They figure you'll answer most of these questions in the pitch meeting, so they're not going to spend too much time on the documents.
Venture capital firms don't actually read business plans, but they sure are glad when founders have one. Business plans aren't really about the document itself — they're about the planning that goes into composing the document.
It's highly unlikely that you're are going to get asked to submit a full business plan to a venture capital firm, but it is likely that you'll be asked all of the hard questions that could be answered in the business plan, so putting one together is a perfect way to prep for your meeting.
Luckily, we have Bizplan's business planning software to help you with this step.
Of all the documents that you're going to be expected to be armed with, the financials are the most important. Most venture capital firms are going to expect a reasonable four-year projection of the income and expenses of the business. They'll want to know how quickly you'll be able to get the business to break even. They'll want to know what you intend to use their money for.
And, of course, they'll want to know how you intend to get their investment back to them — with a healthy return.
You should be prepared to provide an income statement, use of proceeds, and breakeven analysis, at the very least.
A pitch deck is essentially a business plan or executive summary spread across 10 to 20 slides in a PowerPoint document.
Here is a complete breakdown on how to create a pitch deck: Pitch Deck: Complete Guide to a Pitch Presentation
Investors like pitch decks because they force you, the founder, to be brief, and hopefully use visuals instead of an endless list of bullet points. The pitch deck is your friend and most trusted ally in the pitch process. You'll use it as your main collateral item to get meetings, it will be the focus point of your meetings, and it will be what investors pursue after meetings.
Once the investor has reviewed your materials and determined they are interested in meeting with you, the next step is to arrange a time for a pitch meeting.
In some cases — particularly with early-stage investment — the pitch meeting is more about the investor liking you as a person than it is just pitching the idea. So take a little time to establish rapport. Investors will more often invest in an entrepreneur they like with an idea they have some reservations about than an idea they like and an entrepreneur they think is a jerk.
During the pitch, you'll run through their pitch deck and answer questions. The goal isn't to get to the end of the pitch deck in 60 minutes or less. The goal should be to find an aspect of the business that the investor actually cares about and zero in on that point. If the investor wants to spend 60 minutes talking about the first slide, you shouldn't rush them.
There are no points awarded for presenting the 20th slide. Focus on the conversation.
The last item is kind of a catch-all that we'll call “due diligence.”
When the venture capital firm gets more interested in a deal, the next phase of discovery is called due diligence. During this phase, they'll dig into all the details of the business, from financials to the details of how the business model works.
This is where all of the research and support you've put together will be put to the test. They're likely going to ask you to prove how you arrived at the market size they're going after. You may also get asked to have your early customers talk to the venture capital firm. Assume the firm is going to do its best to make sure everything you said actually checks out.
As you embark on this process of getting venture capital, you're going to hit a lot of hurdles. You're going to be torn down — and you're going to hear a lot of “nos.” Raising venture capital is often one of the hardest and most frustrating part of the startup lifecycle, but it's also potentially one of the most rewarding.
Because if you persist and persist and find the right fit? That check is going to be what takes your company from bootstrapped to international.
For your startup to succeed, you need to have a great idea and the passion to make it happen. You also need money. While you can start a business with your own savings, it's often more practical to get venture capital funding from investors who believe in your company.
Find investors who understand your industry and have experience investing in companies in that space. Investors who understand the industry have more insight into what will work and what won't. They'll be able to help you avoid common mistakes that many startups make when starting up their business.
Look at how much money other companies like yours have raised through crowdfunding platforms like Kickstarter or Indiegogo. These platforms are good indicators of whether there is consumer interest in products similar to yours, which can help inform decisions about whether or not it's worth pursuing venture capital funding.
Make sure you have a strong team already assembled before approaching investors for funding; they want to see that you know how to run the business and that there is someone capable of making decisions on their behalf if they decide they don't want to invest in the company after all (which happens all too often).
And don't forget these highlighted points:
1. Have a great idea and product
2. Make a convincing pitch to investors
3. Get ready for a lot of hard work
4. Be prepared to take some risks
5. Follow-up with style
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