One of the most sought after financing methods for entrepreneurs is venture capital. The process involved in obtaining venture capital is usually long and complex, so it is advisable to have a good understanding of it before entering.
The work has already been done for you in the form of an e-book entitled “How to Get Venture Capital Financing”, which details the process from start to finish, with the first in mind. It is a free resource that is a must-read for any business owner who wants to get VC funding.
The most important conclusions of the e-book are highlighted below.
1. Have a good understanding of venture capital at an early stage
Entrepreneur defines venture capital financing as funds that flow to a company, usually during the pre-listing process, in the form of an investment rather than a loan. Investments are controlled by a small individual or group called venture capitalists (VCs) and are secured by a substantial ownership position and require a high rate of return.
Simply put, venture capitalists make investments in companies and get capital in those businesses in return, hoping to see a positive return on that investment. The main source of venture capital funds are usually institutional and private investors. Typically, venture capital investments are essentially long-term partnerships between firms and venture capital firms.
2. Determine if your business is ready for venture capital financing
The best time to approach VCs for an investment will vary by company. While you can attract a venture capitalist with just one idea, the vast majority of bids close when a company has 3 specific elements:
- A team of founders
- A minimum viable product (MVP)
Venture capital is targeted at companies that have high start-up costs and are designed to grow rapidly. To have the best chance of getting VC funding, it’s important to have a disruptive idea, preferably in an industry where VCs often invest heavily, such as technology, along with an impressive management team.
3. Build a Pitch Deck and a presentation
A solid cover letter will be your business card if you expect to raise money from a VC, as well as the starting point for most introductory meetings.
A pitch deck refers to a presentation that provides an overview of the business. It can be used to share information about your service or product, the market opportunity, your business model, your management team, and your company’s financing needs.
It is important that a pitch deck be short, concise, and cover the following:
- Company finance
- Investment amount
- Business progress
- Pain point and market solution
- Management team
4. Find the right VC to finance your business
All venture capital firms have a specific focus on the type of firms they finance. They usually invest in consumer products, software, green technologies, fintech, AI or any other business category. Each venture capital firm focuses on a different stage of investment (Series A, Series B, Series C, Seed, Initial Phase, etc.) Therefore, research is the first step in reaching venture capital.
Once you have a list of VC goals to approach, now is the time to set up meetings. You’ll have 2 opportunities to connect: a cold email to a VC partner or a presentation from someone on your network.
5. Full Term VC domains
The terms and conditions are basically a non-binding list of prerequisites for VC funding. It is also known informally as the first real role a founder receives from a VC once he has made the decision to invest.
A term sheet has 3 key sections:
- Financing Section: Establishes the financial guidelines for the proposed investment. Explain how much money the venture capital firm is willing to invest and what it wants from your business in return.
- Corporate Governance Section: Used to define the distribution of power between investors and founders with respect to company decisions.
- The liquidation and exit section: describes what will happen to shareholders and investors if the company is sold, dissolved or liquidated. Defines who will be paid first and highlights the specific preferences given to investors.
6. Complete the Due Diligence and close the deal
You may be more likely to close a deal with a VC as a founder if you prepare well for due diligence, which refers to the process used by investors to gather the necessary information about the potential or actual risk involved in an investment. It is also important to be familiar with the reasons why tenders often go wrong and take proactive steps to encourage closure.
The final step in a VC financing agreement is the time to find the alignment between the VC company, your internal teams, and your legal advisors. Founders should quickly meet commitments during this time and provide accurate information about their businesses.