Venture capitalists are responsible for funding some of the largest companies in the world. Do you have a business idea that could turn into the next Apple or Google? If so, then venture capital is a great way to fund your startup. In this post we take a look at how venture capital works, who it's best suited to, and what you can do to find the money you need to build your business.
Be prepared before you try to get money
The first step in raising venture capital is to get ready.
Preparing to raise capital can take months or even years of hard work and discipline. If you think you can't spare the time, you probably haven't yet raised enough money to be successful anyway. The problem with raising too little money is that it's a waste of everyone's time. Raising $100,000 for a business that needs $1 million puts you in exactly the same situation as if you hadn't raised anything at all. Yes, there are some exceptions to this rule. But by far the most common mistake entrepreneurs make is not having enough cash in the bank.
People who don't have enough money often look for shortcuts, such as "bootstrapping." Bootstrap companies are generally those whose founders scrape together just enough money to get their companies started and then make the best of what they have. These companies usually have no choice but to bootstrap because they can't get any other kind of financing. Bootstrapping is not a good strategy when venture capitalists are available.
It's important not to confuse bootstrapping with being frugal and efficient, which are essential traits of every successful company, whether or not its founders raise money from venture capitalists (VCs).
Have your financial projections ready
Getting venture capital for a business is not easy. Venture capitalists run a business and are looking for businesses that can provide them with the highest return on their investment. There are many ways to find venture capital, but one of the best ways to get funding is by pitching your company to them.
The first thing a venture capitalist may do is look at your business plan and they're going to look at your financial projections and see if you have all of your numbers in line before they want to meet you. This means that you need an excellent business plan and excellent financial projections. If your projections don't make sense or aren't realistic, it's not likely that a venture capitalist will want to talk with you about investing in your company.
The next thing a venture capitalist may do is look at your executive summary. The executive summary should be written in such a way that it grabs attention immediately and makes it clear that this is an investment opportunity they can't afford to ignore.
The last thing a venture capitalist will do is meet with you. At this meeting, they are going to want to know more about you and why they should invest in your company. They will also be looking for signs that you are committed and passionate about your business idea, so be prepared to answer all questions with exuberance and intelligence.
Keep track of your investor pipeline
When a startup is ready to sell shares, the firm's management and board members typically round up a group of investors who are interested in investing. This "pipeline" of investors is a list of people you can contact when you're ready to raise capital.
Tailor your message to each potential investor. Explain how the firm plans to use its money and what sort of returns the investor can expect. In other words, make them understand why they should be interested in investing.
One tactic that has been used with success at several startups is to send potential investors periodic emails outlining company accomplishments along with financial results, product evaluations or industry trends that bode well for the company's performance. An email update once a month may remind interested parties they're still on the list of possibles and keep interest alive.
Then, when it's time to approach venture capitalists, you have a list of investors who are already familiar with your business model, statistics and goals.
Pick the right amount of capital for your business
In order to get the right amount of capital, you need to be able to justify how much you need and what you’ll do with it.
To figure out how much you’ll need, identify your burn rate. This is a simple calculation. It’s your monthly expenses divided by the number of months you can survive before running out of cash.
Say you have $100,000 in the bank and spend $20,000 per month on rent, salaries, advertising, etc. You can survive for five months ($100,000 divided by $20,000). If you plan to raise money after three months, then your burn rate is three months; if you plan to raise it after six months then your burn rate is six months.
Most businesses that are raising their first round of venture capital want their burn rate to be at least 12 months from the date they get their new financing. This might seem like a long time but there are many reasons why this is a good idea:
You can change things about your business that aren’t working without feeling rushed to put another deal together.
You will have more time to negotiate a better deal with investors (i.e., more favorable terms) because you won’t feel desperate or crunched for time.
While it seems like the quest for capital never ends, there is light at the end of the tunnel. If you’re a business owner considering trying to get venture capital for your company, hopefully this short guide will help you get on the right track to success. As you likely already know, a successful pitch can be life-changing for any business owner, and it can take a lot of hard work to put together. However, after reading this guide, you should have a general idea of what to expect from Venture Capital Funding and what steps to take in your journey towards raising it.