Launching and running a startup is hard work. Along with creating a website for your business and developing a great product, you also need to think about funding. One type of funding you may want to pursue is venture capital, or “VC.”
It’s essential to be clear on what “venture capital” actually means. The term is often used interchangeably with “angel investment,” but they are not the same. Angel investors invest their own money, whereas venture capitalists (VCs) invest in companies using other people’s funds. VC usually comes from corporations, wealthy individuals, insurance companies, and endowments.
If they invest in you, VCs expect you to grow your business as much as possible so they can make significant returns. VCs are generally very selective and tend to choose businesses that are around four years old. At this stage, your business should be well-established but still have a lot of room to grow. When you accept funds from a VC, you will have to give up some equity in your business.
Here’s how to improve your chances of securing VC:
1. Be realistic about your chances
Just over a third of venture capital (36%) goes to software startups, 17% goes to biotechnology firms, and 10% goes to companies in the media and entertainment sector. So, if you’re in tech, you have a much better chance than everyone else. If your startup falls outside these categories, you are less likely to succeed.
2. Write a polished business plan
You need to prepare an elevator pitch, a comprehensive pitch deck, and detailed financial projections. Some VCs are willing to invest in a fairly new company. Still, in most cases, you will need a minimum viable product (MVP), a customer base, and a reliable founding team who are committed to the project’s success.
3. Get clear on your capitalization
You should be able to outline, in detail, who owns your company. Who are your shareholders, and what are their rights? Investors will need this information because they will want to know whether their investment will be diluted.
4. Pick your VC targets carefully
VCs vary in terms of size and specialism. Some can offer hundreds of thousands of dollars, whereas others invest millions. Some prefer to invest in small companies, whereas others are more interested in larger enterprises.
VC organizations, such as the National Venture Capital Association, list potential investors on their websites. This gives you a good starting point for selecting your targets. Specialist networking events can also be useful.
You are more likely to get funding if someone in your field can introduce you to a VC directly, but cold calling can work too. The golden rule: Never send a generic email to a VC. Take time to tailor your opening message. Explain why you have approached them, give them a brief overview of your business goals, and make it easy for them to get in touch with you – provide your phone number along with an email address. Be direct and honest.
5. Hire experts
Getting VC is a huge undertaking and a key turning point for your business. Hire legal and financial advisors who can guide you through the process. Experienced professionals don’t come cheap, but having the right people on your side will stop you from making common rookie mistakes and help you secure a good deal.
6. Do your due diligence
Before agreeing to fund your business, a VC will conduct a thorough background check on your startup. This is known as “due diligence.” However, it should go both ways. You don’t have to accept the first offer you get. Do a bit of digging – does the firm have a good reputation? Do they have a good track record of helping startups grow?
7. Set a deadline – and follow-through
Finally, have patience. Don’t expect a decision overnight, or even within a few weeks. It can take months to reach a mutually agreeable deal. However, don’t put your life or business plans on hold forever. Set a reasonable deadline and be willing to walk away if it passes. You may have to hear a lot of “No’s” before getting the funding you need. Persistence and patience are key to securing VC.