When your startup secures first funding from VCs, endless options on where the money should go will likely race through your mind. But do you actually know what venture capital firms want once they’ve funded you? Let’s discuss that today.
It is a great milestone to earn a venture capital firm’s backing of your business. It means that someone else believes in your idea and potential for growth. But did you know it can potentially get overwhelming when that happens?
Aside from the boatload of action items that might go through your head, there’s also that admissible pressure to do well. You may wonder what the investors want now that they’ve put their faith in you.
What are the expectations? What do they want to see to continue funding your business?
In this article, we’ll take a look at five things venture capitalists expect from startups after they’ve funded them. We’ll also explore why they want these things and how it can benefit both parties involved. To start, let’s have a look at the relationship between startup businesses and VCs.
Venture Capitalists And My Startup
Startups and venture capitalists have a symbiotic relationship. VCs provide startups with the capital they need to grow and scale. They are in the business of investing in businesses that have a huge capacity for growth.
As such, one of their criteria before investing is to verify if the startup is showing vast growth potential. With their investment, VCs typically want a seat on the startup’s board of directors and a say in how the company is run.
Meanwhile, startups provide VCs with the opportunity to invest in high-growth businesses. In order to increase their chances of getting funded, startups need to show that they have a sound business plan and are capable of scaling up quickly.
They also need to demonstrate that they have a good understanding of their target market and what it takes to succeed in it.
There are a number of reasons why startups might reach out to venture capital firms for funding. You may find yourself in the following situations:
- Your startup business is experiencing rapid growth
- You need capital to scale up your operations or manpower
- A roadblock that needs money is stopping you from scaling
But in any case, there’s usually a good reason why a startup would turn to VCs for funding. Aside from angel investors and accelerators or incubators, venture capital firms are easy to find.
If you’re a startup looking for funding, it’s important to research different VC firms and find one that’s a good fit for your business. Don’t just go after the biggest and most well-known VCs there are.
There are plenty of other firms that might be a better fit for your company. So, wisely research whom you present your ideas to.
What Venture Capital Firms Want: 5 Action Items for You
So, what do venture capitalists want from you after they’ve funded your business? Here are 5 things VC firms want:
1. A return on their investment
The most obvious thing venture capitalists want from startups is a return on their own investment. They’re investing their money into your business, expecting to see their investment multiply.
There are various ways to categorize the kind of ROI they want. This could come in the form of equity in the company, dividends, or even a buyout. Typically, they want to see a return on their investment within five to seven years, but this number varies.
Let’s say a VC firm invests $1 million into your startup. Then your startup becomes very successful and is eventually bought out by a larger company for $100 million. The VC firm would then see a return of 10x their original investment.
2. A seat on the board of directors table
Another thing that venture capitalists often want is a seat on the startup’s board of directors. This gives them voting power in how the company is run and allows them to provide input on important decisions.
Board seats also give VCs the ability to monitor the startup’s progress and ensure that their investment is being used wisely. In this way, there is transparency and checks and balances regarding how the funding flows within the operations.
3. A voice in the company’s decision-making
In addition to wanting a seat on the board of directors, venture capitalists also want a say in how the company is run. This includes having a voice in major decisions such as what products to develop, what markets to enter, and how to allocate resources. VCs want to ensure that their investment is being used in a way that will maximize growth and profitability.
In many cases, a VC firm will send a representative to sit on the board of directors to your startup. This person usually has experience in your type of business and investment.
In their role, they act as a mentor or advisor to the startup’s management team. They will also update major business decisions with their firm to keep tabs on your company’s progress.
4. A share of the profits
Another thing that venture capitalists typically want is a share of the profits. After all, it’s the sweet whipped cream on top of a VC’s piece of the pie!
The share in profits gives venture capitalists a financial stake in the success of your startup and aligns their interests with those of your company. Profit-sharing arrangements can be structured in many different ways, so it’s important to discuss this with your VC firm ahead of time.
For example, the VC firm may obtain a percentage of your profits yearly. Or they could get their share all at once if and when your company is sold. As such, the arrangements may also depend on your exit strategy.
5. An exit strategy
Finally, venture capitalists also typically want an exit strategy planned out. This means they want to know how they will get their money back when they eventually sell their stake in the company.
So, at the very beginning, discussing how you will go about your exit plan with your investors is imperative. Once you get funded, they will want a follow-through of your exit arrangements when the time comes.
An exit strategy can take several different forms, such as an Initial Public Offering (IPO), a sale to another company, or a buyout by the founders.
Final Thoughts On What Venture Capital Firms Want
We have just discussed the five things that venture capitalists typically want from startups. However, it is also important to keep in mind that every VC firm is different.
Some firms may be more flexible than others in terms of what they’re willing to accept in exchange for their investment. So, do your research and pitch your business to the right firm to increase your chances of getting funded.
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