By Justin Biel, trends editor at Grow Wire
Venture capital is one of entrepreneurs’ most sought-after financing methods. The process of attaining VC is often long and complex, so it’s wise to have a solid understanding of it before jumping in.
We’ve done the legwork for you and developed an e-book called “How to Get VC Funding” that details the process from start to finish, with first-timers in mind. This free resource is a must-read for any businessperson looking to get VC funding. We’ll highlight the most critical takeaways from the e-book below.
For a full rundown, download the “How to Get VC Funding” e-book.
1. Get an understanding of early-stage venture capital.
Entrepreneur offers the following definition for VC:
“Funds flowing into a company, generally during pre-IPO process, in the form of an investment rather than a loan. Controlled by an individual or small group known as venture capitalists (VCs), these investments require a high rate of return and are secured by a substantial ownership position in the business.”
In the simplest terms, venture capital firms invest in companies in exchange for equity in the business, with hopes of seeing a positive return on their investment. Institutional and private investors are the main source of VC money. Typically, these VC investments are long-term partnerships between companies and venture capital firms.
Learn more about the basics of VC on pages 2-7 of the “How to Get VC Funding” e-book.
2. Determine if your company is ready to pursue VC financing.
The right moment to approach VCs for investment is different for each company. It’s possible to attract a VC partner with only an idea, but the majority of deals are closed after a business has three concrete items:
- A founding team
- A minimum viable product (MVP)
VC is geared toward companies that are designed to grow quickly and have high startup costs. For the best chance of scoring venture capital funding, you need a disruptive idea -- ideally in an industry where VCs tend to invest heavily, like technology -- and an impressive management team.
For more on how to tell whether your company is ready for VC, see pages 8-13 of the “How to Get VC Funding” e-book.
3. Build a pitch deck and presentation.
If you're hoping to raise money from a VC, a solid pitch deck will be your calling card and the starting point of most introductory meetings.
A pitch deck is a presentation that provides an overview of your business. The deck can share insights about your product or service, business model, market opportunity, company funding needs and your management team.
A pitch deck should be short, concise and cover the following elements:
Market pain point and solution
For more on crafting your pitch deck and presentation, see pages 14-18 of the “How to Get VC Funding” e-book.
4. Find the right VC to fund your business.
All venture capital firms have a specific focus regarding the types of companies they fund: They might invest mainly in software, consumer products, fintech, green technologies, AI or any other category of business. And each firm focuses on different stages of investment (seed, early-stage, Series A, Series B, Series C and so forth). Thus, the first step in reaching out to VCs is research.
Once you’ve got a target list of VCs to approach, it's time to set up meetings. You have two opportunities to make connections: an intro from someone in your network or a cold email to a VC partner.
Learn more about finding the right VC on pages 19-23 of the “How to Get VC Funding” e-book.
5. Master the VC term sheet.
A term sheet as “a non-binding listing of preliminary terms for venture capital financing,” per the dictionary. CB Insights refers to it as “the first real piece of paper a founder sees from a VC when they decide that they’re interested in investing.”
There are three main sections of a terms sheet:
The funding section lays out the financial guidelines of the proposed investment. It outlines how much money the VC firm is offering to invest and what it wants from your company in return.
The main purpose of the corporate governance section is to define the distribution of power between founders and investors as it relates to company decisions.
The liquidation and exit section of describes what will happen to investors and shareholders if your company is liquidated, dissolved or sold. It defines who gets paid first and highlights any particular preferences given to investors.
Learn how to negotiate a term sheet on pages 24-30 of the “How to Get VC Funding” e-book.
6. Complete due diligence, and close the deal.
As a founder, you can increase your chances of closing a deal with VCs by preparing well for due diligence, or the process by which investors “gather necessary information on the actual or potential risks involved in an investment.” You can also get familiar with the reasons that deals often go awry and take proactive steps to encourage a close.
The final stage of a VC funding deal is the time to find alignment across your internal teams, the VC firm and your legal advisors. During this time, founders should quickly follow through on commitments to investors and provide accurate information about their companies.
Read more about VC-founder relationships on pages 31-34 of the “How to Get VC Funding” e-book.