What is Venture Capital?

In exchange for the investment, investors (or venture capitalists) will expect a return on their investment, usually in the form of a share of the company’s profits, as well as a return on their original investment. VC is primarily used in the tech industry and is usually offered by an investor specializing in providing startup funding. Venture capital is the most expensive type of capital investment; why? Because 99% of the time, a VC will consume a large portion of your equity. Remember you have 100%, no more, no less. Once 20% is gone, it is gone… and in most cases, Venture Capitalists, especially leading VCs, will demand a board seat.

What is a Venture Capitalist?

A venture capitalist is a person or group of people who puts money into a potentially high-growth startup company in exchange for equity. They take a much higher risk than a traditional investor and can be compensated with a greater return. The target is a 10X return, so more than a typical stock investor. VCs are typically experienced investors who have already funded several companies during their careers. They are often experts in a particular industry or sector and prefer to invest in startups in the same sector. Be ready to answer questions about your business, your industry, the competition, your team, and your revenue & profit forecasts. A typical venture capitalist might ask you about the following topics: 

The market you are targeting:

• Who are the customers?
• How big is the market?
• How many competitors exist?
• What is your strategy for capturing your share?

The product or service: 

• How does the product or service work?
• How does it differentiate from the competition?
• Do you have a growth strategy for scaling? What is that in detail?

The team: 

• What experience does each team member have. Define the value they bring?
• What backgrounds are needed for success?
• What are the hiring plans? 

The financing: 

• What is your revenue model?
• What is your profit forecast?
• What is your capitalization strategy?

The exit strategy: 

• How will you achieve the desired outcome?
•  Acquired or go public?

Understanding Your Exit Strategy

In order to secure a VC’s investment, you will have to agree to a certain share of the company’s ownership, known as equity. The percentage of shares you give up will be based on the price they pay for their initial investment. For example, if a venture capitalist puts up $1 million to fund your business, the ownership stake they receive is going to be higher than if they put up $100,000. No matter the amount invested, always ask, “What is the minimum amount of money this person will need to make a positive return from the deal?” This amount of money would allow VC to say, “That’s good enough. I made my money back, and I don’t need to put in anymore.” This is also known as the venture capitalist’s minimum viable investment (MVI).

How to Raise Venture Capital?

There are many ways to approach venture capitalists, but these are the most common ways: 

Cold Calling

The most common method. First, create a list of potential investors and then call them to schedule a meeting. The advantages of this approach are that you can reach many potential investors with one call. The drawbacks are that you may end up meeting with people who aren’t qualified to fund your business. 

Networking

Connecting with potential investors through your personal and professional networks is a great way to get introduced to investors who may be interested in your business. The advantages of this approach are that you can more effectively target the right people and build a relationship with them over time. The drawbacks are that you may be disappointing people who don’t have the money to invest in your business (life happens), and you may be on the receiving end of some unwanted sales pitches (ditto). 

Going Through an Intermediary

An experienced and credible intermediary can help you to gain access to the right venture capitalists. Many online platforms, like Foundersuite, Gust, and Qodeo, match startups with investors.

 

Pros of Raising Venture Capital

• VC firms can provide great value to your business, including operational support, excellent advice, and introductions to industry partners. 
• You may receive a higher valuation for your business. 
• You’ll have cash flow and liquidity. 
• You’ll have access to growth capital to support your company’s expansion.
• Your team will have access to experts and connections that would take years to gain otherwise.

Cons of Raising Venture Capital

• Typically you’ll lose a significant portion of your company’s equity. 
• Seed stages (Friends and Family, Pre-seed, Seed) Usually Convertible Debt Notes, i.e., Safe note , but figure 20%-30%
• Series A, Typically 15-30%
• Series B, Typically 10-15%
• Series C, Typically 10-15%
• Series D, Typically 7-15%
• The relationship between you and your investors will be more complicated. 
• You may have to accept short-term pressure to grow your company’s profit margins. 
• You’ll have to give up decision-making control. 
• Your business will be more complex to manage due to a larger management team. 
• The company culture will change. 
• Your investors might demand a higher return on investment. 

Conclusion

Raising capital can be an integral part of growing your business and achieving long-term success. Venture Capital is a solid option to achieve that goal. As you research investors and prepare for pitches, remember that you are asking for a significant amount of money, so you’ll need to be strategic and prepared. If you’re able to find a good investor, you’ll have the funds necessary to grow your business and the expertise that can guide you to success.

Let me know your thoughts in the comments!