Are you an aspiring entrepreneur with a great idea that will revolutionalize the world? Well, maybe you don’t have such grand ideas but you are looking to start your own company. One of the biggest problems that to-be business owners have is not enough capital to turn their ideas into reality.
If you’re one of those who face such problems, then maybe you should consider getting venture capital funding from early stage vc firms. If this is your first time hearing of VC, then you’re in the right place!
In today’s article, we’re going to tell you everything you need to know about VC and whether this funding option is right for your business. So, keep reading to find out more!
What is Venture Capital
First things first, what is VC? Venture capital is essentially funding given to start-ups or small and mid-size enterprises (SMEs) that have a high potential to succeed in the future.
Venture capital firms or venture capitalists will invest in these businesses in hopes of generating large returns of investment in the long term.
How is VC funded?
If you’re seeking investment from venture capital firms, these firms will usually get investments from institutional investors or wealthy individual investors.
Venture capitalists are usually high-net-worth individuals that have amassed a substantial amount of wealth through past careers and are looking to invest their money in start-ups or SMEs.
After investing in companies, VC firms will usually also own a stake in the company. This means that VC firms don’t just give you capital and walk away. They often attend business meetings and want to have a say in how the company is run to ensure that their investment is protected. You can check out the website of your venture capital firm to understand the ethos and work ethic they follow.
As such, if you’re worried about potential conflicts of interest, then maybe you should think twice about getting VC funding for your company. Usually, VC firms will exit such ‘partnerships’ after five to seven years.
Is My Business Ready For VC
Determining whether or not your company is ready for VC funding depends on quite a number of factors. And, in most cases, it varies from business to business.
There are three main factors that businesses have before seeking VC funding:
- A solid customer base
- MVP a.k.a minimum viable product
- A founding team
Other than these factors listed, it’s also good for your business to possess the following:
- A good reason why a VC firm should invest in your business
- Clear business structure
- Opportunity for VC firms to be actively involved in your business
- Good potential for high returns
- An exit strategy for when VC firms stop funding your business
The Five Steps to Securing VC Funding
So, now that you’ve determined whether your business is ready for VC funding, how should you go about seeking investments? We’ve broken down some of the most common ways to get started:
1. Idea
First and foremost, you need an outstanding idea for your business. There are thousands of other companies that are just starting out, hoping to raise capital. So, why should VC firms pick your business?
VC firms are looking for businesses that have the potential to grow fast, secure a significant market share and become public through an Initial Public Offering (IPO).
If you think that your business idea may not suit these requirements perhaps you should look into other forms of financing.
Related Resource: What Your Shop Needs to Invest In This Year to Boost its Revenue
2. Pitch
Secondly, you need to pitch your business to VC firms. Pitching your business can come in various forms. You can go the traditional route by cold-emailing VC firms if you have no connections in the industry. However, the preferred route is to network with individuals who work at VC firms before pitching your business.
By establishing relationships first, you lay the groundwork which may make it easier for you to convince VC firms that you are passionate about your business idea and that your business has the potential to grow.
Another tip is to find VC firms that have invested in companies that are similar to yours. If you’re working on a tech start-up, look for VC firms that have invested in businesses in the tech industry.
3. Meetings
After you’ve contacted VC firms, you need to meet them. When you’re able to schedule a meeting varies for everyone. If you have strong connections, you’ll probably be able to schedule a meeting with VC firms within a couple of weeks.
However, if you’re cold-emailing them, it may take a while for them to get back to you. As such, we strongly encourage you to do some networking within the VC industry.
4. Due Diligence
After you manage to secure a meeting with a VC firm, there are a few follow-up steps that need to be taken before you secure VC funding.
The due diligence process usually lasts from half a month to a full month and it consists of reviews on your business’s founding team, customer base, product, and financial standing.
5. Terms sheets and funding
Once a VC firm has decided to fund your business, you will receive a terms sheet from them that lists out the terms of your deal.
Most terms sheets are negotiable so nothing is set in stone till both parties have agreed to the terms and signed the sheet. Once the terms sheet has been signed, you’ll receive your funding.
How Long Does The Process Take?
As with many of the points that we’ve shared in this article, how you go about securing VC funding and how long the process takes vary from company to company. Also, the duration of the partnership between a start-up and VC firm can last anywhere from one to ten years.
For bigger businesses, the VC process tends to take a long time as these projects require larger investments. As such, VC firms will take a longer time to decide whether or not they want to invest in the business and what the roadmap will be like.
However, for businesses that are looking for VC funding, the sooner you start, the better. If your business has all the main factors identified in the previous paragraphs, you should start networking and connecting with VC firms as soon as possible.
Conclusion
With that, we hope we’ve shed some light on VC and what you can expect when you start looking for VC firms to invest in your business!
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