Knowing how to get venture capital funding for your start-up can be make or break. But what makes VC investors tick and what do they look for? Read on to discover how to streamline the fundraising process and increase your chances of success.
Venture capital (VC) is investment finance that’s made available to entrepreneurs who are building new businesses. The original VC fund was set up in 1946 by Professor Georges Doriot, also known as the Father of Venture Capital, to provide growth investment for inventions made in the second world war.
The approach taken by Doriot’s American Research and Development Corporation, which involved taking equity and shared leadership of a business, has been largely followed ever since. And the active role that VC funds take in their investments is an important consideration for start-ups to bear in mind.
On the upside, VC funds and high net worth individuals (HNWIs)/angel investors have large financial resources under management. Recent investments around the world show they are willing to continue pouring funding into technology start-ups in particular, despite their high propensity to fail and the long road to profitability they travel.
Being able to announce an investment by a successful VC or individual investor brings huge kudos to a start-up, because it shows that investor has seen potential in their idea, quality in their management team and an opportunity to secure a strong return.
On the downside, VCs will almost certainly want to recommend a director onto a start-up’s board, which means more scrutiny for the founders and less personal control over the direction the business will take. Founders will also need to give up a large percentage of equity and agree to an exit strategy around six or seven years into the future.
Having weighed up the option of securing VC funding over alternatives such as bank loans, crowdfunding or borrowing from friends and family, and deciding to go for it, the hard work begins.
While it’s well known that VC funds are sitting on record highs of money, there are also multitudes of start-ups trying to access them. So knowing how to apply for venture capital funding successfully and stand out from the crowd is key.
Explain what your venture does, your management team’s background and experience, the potential market for your product or service, your USP, current financial position, and your future investment needs. This can be adapted to purpose, for example as a pitch deck, or as a longer financial ‘equity story’ document.
Watch Innovate Finance’s recent webinar for more tips and advice on ‘How to Fundraise in Uncertain Times’.
VC funds focus on different niches, be that healthtech, deep tech, property, infrastructure or energy. They may also focus on spin-outs from a particular university or start-ups in a specific region.
It’s highly unlikely that an email, cold call or letter to a VC will even elicit a response, so a better way to contact VCs is to be introduced by a mutual business partner such as a lawyer or consultant.
Any entrepreneurial hub, whether it’s Cambridge or Silicon Roundabout in London, will be the centre for useful networking events including specially themed ‘speed dating’ pitch meetings with VC funds or angel investors.
Use social media such as LinkedIn to build awareness of your product or service, and/or engage with a public relations (PR) agency that specialises in supporting start-up clients with media relations and networking support.
Related Read: A Start-Up’s Guide to Investor Relations
Once you have gained the attention of a VC, you can expect them to complete a period of due diligence as they work out whether to take on the risk of making a new investment in your business.
As well as asking tough questions about current and future financial performance, VCs will want to know that you have the best people on board to lead the company to success.
It pays to be as open and honest as possible at this stage – no matter how passionate you are about your start-up’s potential, that will be no substitute for hard facts. On this occasion it’s definitely about the steak and not the sizzle.
Putting yourself in a VC’s shoes, you can understand why. Their core reason for being is to make money on their investments, so they want to remove as much uncertainty as possible. Estimates vary on the numbers, but only a small minority of investments deliver sizeable returns. VCs need in-depth details on how you would spend their money and how this would contribute to your mid to longer-term success.
If you pass the due diligence test, the VC will outline in a term sheet how much money they are prepared to invest and what percentage of the equity they propose to take. The money will not be given in one sum, but in different rounds so that progress can be measured over time. Term sheets will also cover the wider conditions of the investment, including the right to further future investment.
VC is not a simple process, but it can yield huge benefits for entrepreneurs, from accessing funds for product development and marketing to leveraging business expertise from new board directors. The keys to success are preparation, transparency and resilience.
We’ve created a checklist to help you ensure your business ticks the boxes of today’s investor during these uncertain times.
If you can confidently tick every single box in the checklist, you’ll be standing in good stead to secure the critical funding you need to help drive your business forward.
Download the checklist to start engaging investors with confidence today.
Get in touch to see how we can streamline your fundraising or cap table management.
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