What You Should Know About Venture Capital Financing
What is Venture Capital?
Venture capital refers to funds which generally come into a company during the pre-IPO process, as investments and not loans. Venture capital investors are often referred to as venture capitalists (VCs). Another name for Venture capital is risk capital because when these investments are made, there is a high probability of the venture capitalists losing their money in the case of a small business crashing.
Both institutional and private investors can carry out venture capital financing. They could either use their personal funds in the case of high net worth individual, capital financing loans, etc. The idea is that VC’s have cash and are looking to invest for growth in small businesses that look like they have what it takes to grow and yield amazing results.
Why do VC’s invest?
One reason – for equity. Venture capital investments are made in exchange for an equity stake or part ownership in a company. These investments come with a long-term partnership between venture capital firms and small businesses.
VC’s do not just want to give you money and take a walk, trusting you to multiply their funds after a while. Instead, they tend to become more involved with the company and the company’s decisions. In other words, they contribute their financial resources and their intellectual resources to proffer better ways to run the company.
Venture capital firms will be with your company till the end, which could either be when it goes public in an IPO, or it gets acquired or bought out by a larger company. Either of these options will be taking a long time, meaning your venture capitalists could be sticking around for quite a while.
How to get their attention
You can attract a Venture Capitalist with just your business idea; however, most Venture Capitalists’ deals can only be closed when your business has three concrete items: a founding team that knows what they’re doing, stable customers or clients, and a minimum viable product (MVP).
Tips for Obtaining Venture Capital Funding
Now that you understand what VC Funding is, the next thing you do is know how to acquire it. There are five basic steps to getting a VC Funding, and they include the following:
Have a good business Idea
Having a business idea is not enough; it has to be good. This could mean either coming up with a solution that the world hasn’t already seen, or finding a different way to do something already being done. Whatever the case may be, something should make your idea stand out.
You need a good business idea that a VC will be interested in. Luckily, VC’s are interested in businesses at their early stages so it’s absolutely okay if you haven’t done so much in terms of building up your dream. To get a VC, you simply need to have a grand idea and know-how to sell it.
Have a great Pitch Deck
This is usually your first marketing collateral shared with a Venture Capital Firm. Your pitch deck is a catchy document that sells your grand dream. Think of it as a 5-minute elevator pitch. Knowing that VC’s are typically bombarded day-in-day-out with hundreds of business ideas, even your pitch deck must be worth remembering.
The pitch deck can be emailed to a firm, but the most appropriate option is to get a warm introduction when someone from your network introduces you to the VC. The better your pitch deck, the higher your chances of securing the investment with the venture capitalists.
Be Prepared for Meetings
Get ready to sit through hours of meetings convincing a capitalist on why you worth the risk. In a case where you haven’t already met with a VC, you can curate a list of Venture Capitalists who are aligned with your business or business idea and seek out ways to meet with them.
Carry out Due Diligence
This is a necessary phase where you have to cross-check all your facts and carry out the assessment. On the one hand, ensure that you have provided all the accurate information to the interested VC’s as one mistake could cost you the opportunity. On the other hand, carry out due diligence on the VC’s you are bringing on board.
Not only do you want to ensure that you don’t end up with fraudsters, but you also want to ensure that the deal you are receiving properly fits your company or not. Read the fine prints and ensure that you are okay with every single phrase. This could save you a lot of stress in the future.
Finalise with a Terms Sheet
When the VC agrees to finance your company, they would typically send a terms sheet to you, which outlines all the deal’s details sheet, which is negotiable and subject to both parties’ agreement. Once both parties have signed the terms sheet, the company can then receive funding and commence the growth process.