Many companies need venture capital funding, including startups. The process of getting venture capital funding may be difficult, but it pays off in a cash infusion for your business which may be able to make the difference between failure and success. Dan Lok explains what venture capital funding is and how to secure it for your business.
What is Venture Capital Funding?
Venture capital is a type of private equity. It is a type of financing that investors can provide to startups and small businesses which are believed to have the potential for success in the long term.
Venture capital comes from wealthy investors, investment banks, and other types of financial institutions. It is not always a financial transaction; sometimes it comes in the form of managerial or technical expertise. Small companies with outstanding growth potential are the most likely to receive venture capital. Companies that are growing quickly and have good potential to continue are often considered.
Venture capital can be risky for the investor, but the possibility of above-average returns is tempting. For new companies with short histories, venture capital has become a popular way to raise capital. This is especially true if the company lacks access to capital markets or bank loans.
The downside to venture capital is that the company or individual doing investing generally get equity in the company. This means that they have a say in your company’s decisions. Some businesses may avoid venture capital funding for this reason.
The Basics of Venture Capital
Large ownership portions of a company are created and then sold to a handful of investors through independent partnerships established by venture capital firms. These partnerships can consist of a pool of different companies. One difference between venture capital and private equity deals, in general, is that venture capital focuses on emerging companies. Regular private equity investors fund larger and more established companies.
Steps Toward Venture Capital Funding
To get venture capital funding, your company should follow the following steps. When following these steps, you will be able to make sure that you are getting the best possible investors for your business and that you will succeed in the future.
1. Determine Whether Your Company is Ready
The right time to pursue venture capital changes for each company. It is possible to attract a venture capital partner with an idea for a business, but most deals are closed after the business has a founding team, a minimum viable product or MVP, and customers. Venture capital companies are most interested in companies with disruptive ideas. They often invest in the technology industry and in other areas with great potential for growth. You will need to have an impressive management team to support your search for venture capital.
2. Pitch Decks and Presentations
The next thing you need to do in order to receive venture capital funding is to create a solid pitch deck. This will be your calling card and a good jumping-off point to discuss your business with potential investors.
Your pitch deck provides an overview of your entire business. This deck shares insights about your service or product, business model, funding needs, and the skills of your management team.
Pitch decks should be short and concise, covering the following information:
- Market pain point and solution
- Management team
- Investment amount needed
- Company progress
- Company financials
3. Look for the Right VC Company
You will need to carefully research VC firms before you pitch your company. Venture capital firms are generally focused on one particular type of company. They may be interested in consumer products, software, fintech, AI, or green technologies. Each firm can also focus on a particular stage of investment, from seed and early-stage funding all the way through to Series C and beyond.
4. Understand VC Term Sheets
A venture capital term sheet is a “non-binding listing of preliminary terms for venture capital financing”. This is the first piece of paper that a founder sees from a venture capital firm when they are communicating their interest in investing in the company.
The funding section of the VC term sheet explains the financial guidelines that need to be followed. This outlines the amount of money that the VC firm can invest and the conditions it wants your company to follow.
The corporate governance section defines the power distribution between the founders and the investors.
The liquidation and exit section describe what happens to shareholders and investors if your company doesn’t make it or is sold. This defines which entity gets paid first and describes any preferences given to investors.
5. Due Diligence and Closing the Deal
Due diligence is the process by which investors assemble the necessary information on the risks involved in an investment. You should know the reasons why deals sometimes go awry, taking proactive steps to secure a successful closing.
When your VC funding deal is close to completion, this is the time to align expectations among your internal teams, legal advisors, and the VC firm itself. Founders need to be able to follow through quickly on their commitments to the investors, providing accurate information about the company.
Taking Advantage of Venture Capital Funding
If you have a startup or quickly growing business, you may be able to attract venture capital funding to help bring your business to maturity. Following these six steps will help you navigate the sometimes-difficult process of securing VC funding. Dan Lok recommends that all companies make sure they have thoroughly researched the deal and all of its implications before signing.