How to Raise Venture Capital for a Startup
As your startup grows, you’ll likely see the need for additional funding. If you’re thinking of raising money, yes, there are several options. In this article, we’ll focus on ways you can raise venture capital.
There are a plethora of sources to secure startup funding. Venture capital (VC) is one of the go-to financing options for small businesses and startups. Generally, VCs are reserved for risky business ideas with high-growth potential.
Since VC firms funnel a considerable amount of money (in millions of dollars), the process of raising money from them is not a piece of cake. You have to go through various hoops to attract their attention.
Want to successfully raise venture capital? Here are some practical tips to guide you.
Ways to Raise Venture Capital
Understand the size of your market
Most entrepreneurs go out believing their ideas are worthy of outside investment. In reality, some may deserve an investment. However, not all will qualify for VC investment.
You see, each business carries a unique potential. That being so, the investment amount varies from business to business. So, a bike shop business will most likely secure a bank loan but not a venture capital fund. That’s because the market size for this business is generally smaller.
Essentially, venture capitalists are looking to invest millions of dollars in businesses with a higher expected return. Besides the company itself, the VC’s attention is keen on the size of a market. If the market is not significant enough, they most likely won’t invest.
However, don’t get the notion that you can’t start a business in a small market. You can, but the chances of securing VC funding are slim. It’s important to have a thorough understanding of your market size before raising money.
Assess your company
Before you approach a venture capital firm, you need a complete assessment of your startup.
Do you know the story behind your business? Have you tested your idea if it will work in the market? Being able to answer these questions gives VC firms if your company is worth the time and money.
Additionally, venture capitalists will look into your leadership team. Is your team ready to lead the company in every phase of growth?
VCs are more likely to focus on companies with plans to go public in the future. Hence, you need to prepare for auditing—to meet the VC requirement or for the IPO (Initial Public Offering) process. Have a Chief Financial Officer or an accountant on board at the start to prepare for eventual auditing.
Also, consider the stage where your company is right now. You might be at the seed, early, mid, or late stage. Generally, these stages are pivotal to a VC’s investment decision. Some funds are appropriate for early-stage businesses (Angel investments), while others may fit succeeding stages. Thus, understanding your growth stage is vital to raising funds.
As soon as you have assembled your team, story, and stage, it’ll be easier now to target a VC firm. Essentially, VCs split their investment strategies according to stages and industry types.
Create a target VC list
The next step is to build a list of VC investors that you want to target. When choosing a VC firm, here are prime factors to consider:
- Investment stage – Seed stage, Series A, B, or C, and others.
- Industry Type
- Capital amount
- Portfolio of Investment Companies
- Investor network
Explore as much as you can about the investment activities and status of your target investors. If you’re looking to raise venture capital, here’s a list of possible venture partners that you can tap.
Get an introduction
Nowadays, sending cold emails to VC partners is not the traditional way to get introduced. Although it may still work once in a while.
VCs expect you to leverage your network to get an introduction. Why? That’s because the VC is connected to someone who already knows the startup founders. As a founder, you should already know how VC works; part of it is to get a warm introduction to the network.
However, don’t lose hope if you don’t have a VC connection at this point. Take time to build relationships. Join events or meetups. Research two or more VC partners that you might have something in common with or a possible connection. Find out if these partners have a similar interest in your field.
Understand the funding process
Remember, each VC firm has its funding process. There may be similarities and differences in the way they handle funding.
Make sure to check on their website for their complete application process. If not, you can contact the VC fund directly. Before you can even raise venture capital, you need to have an understanding of the process.
The VC approves funds through partner meetings. Throughout the meeting, partners will review their existing investments and support new ones. So, your aim here is to make it to these partner meetings and have your pitch approved.
Read the term sheets
If you have successfully passed the funding process, you’ll most likely receive the term sheet. Congrats! This is only the beginning of your business journey.
In a nutshell, a term sheet is a non-binding agreement that outlines all the terms and conditions of the venture capital fund. Basically, it contains what the fund will offer and what they will expect in return.
Make sure to read this document carefully. Never skim over; familiarize all the requirements stated in the document. If you need more clarifications, have a lawyer review them. Your lawyer should be able to read and comprehend the steps to take to fulfill this agreement.
Do your part
If you already have the funding, your role is not done yet. This is the best time to show them what you can do. Perform the things you promised to the VC fund. Give your best to assure them that they made the best decision for investing in your company. If your company is doing well, you might just get additional funding in the future.
Also, you need to communicate with the VC fund regularly. Provide them updates or suggestions to improve the company. Doing so allows them to stay involved and provide advice and guidance to increase your company’s growth and success.
Scale your Startup with Venture Capital
In summary, these tips should guide you to raise venture capital to fund your startup. It’s not easy, but with preparation, they can be done.
By considering your startup’s strengths, creating the right connections, and understanding the funding process, you are in a better position to secure VC funding.
To increase your chances of raising funds, maybe we can help. Matt DeCoursey and Matt Watson are two of the prominent experts in Kansas City’s startup scene. They also co-found Full Scale, a top-notch software development partner for up-and-coming startups.
Our team of software developers, web designers, project managers, and marketing specialists will deliver your projects from start to finish. Message us to know how our Rockstar team can grow your startup dream quickly and affordably.