Are you wondering how to seek venture capital funding for your startup? Or should you even start a new business?
We’re post-pandemic but still facing tremendous uncertainty. Globally, countries are dealing either with growing inflation or recession.
Yet, it’s still a fantastic time to launch a new business or scale your company to the next level.
Unless you can self-invest, you’ll need to secure venture capital funding. Of course, you could get a loan, but then you’ll have debt at a time when your cash flow is less able to handle it.
In this article, we offer 15 tips from experts to help you secure venture capital funding.
(Note: This article was updated on 19-2-23)
First Some Basics
There are four stages in your business cycle when you might pitch to VC funders:
- Seed capital: This is money to help you launch. You have a product prototype but no customers yet. Seed capital will help you get your product through development, out the door, and into the market.
- Early-stage capital: Your business has been up and running for a few years, you’ve scaled up quickly, and now you’re ready to take the next leap. VC funding at this stage will help you with operating costs during this leg of your journey.
- Expansion capital is cash to help you move into new markets or engage in strategies to expand your customer base.
- Late-stage capital: Well-established businesses with a track record of success and ready to grow can access VC funding to increase working capital or boost marketing outreach.
The primary benefit of VC funding is that it’s not a loan. If you’re a startup or early-stage company, your cash flow needs to be free of debt. However, on the flip side, when you take VC funding, you give away a percentage of control of your company. VC capital comes in exchange for shares.
How to Secure Venture Capital Funding
1. Be Patient, Persistent, and Passionate
VC funders are looking for a return on their investment. They want to see growth potential and an ability to reach a broad audience and become a leader in your niche. They love disrupters, founders with passion, products, or ideas that solve global problems. Alon Goren of Draper Goren Holm says the most crucial factor for them is that “people are persistent, people can execute, and are passionate.”
2. Recognize Inherent Biases
Raising venture capital funding is not easy, especially today. And, if you’re a woman founder or person of color, your chances of being funded drop dramatically.
A Female Founders Fund report stated that in 2019 only 2.7% of VC funding went to women-founded companies, while 14% of companies headed by both men and women were funded. Black-led startups faced a more abysmal record, with only .64 % of total VC funding going to them in 2019. And while the medium seed funding for startups is around $2.1 million, Black and Latin founders receive, on average, $475,000.
But the situation appears to be improving. According to a Forbes article, women-founded startups were on track to raise more than $7 billion during the first three quarters of 2021, a 59% increase year over year, according to Crunchbase. However, the number of women in general partner positions at venture capital firms is only 15.4%, higher than in previous years but a very slow climb.
3. Research Funders Before Pitching
You don’t want to pitch to any VC funder. Do some research. Questions to ask are:
- What is their track record with other startups?
- Will I be able to tap into other growth expertise outside of financial support? Such as their networks and business management expertise.
- Is the VC capital team hands-on, or do they give more flexibility to the founder?
- How much oversight will they require?
- Do your personalities mesh? Remember, it’s not like they give you the money and then disappear. You’re going to be in a long-term relationship. You want to enjoy working together rather than dreading all interactions.
4. Match Venture Capital Funding Sources to What You Need to Raise
Identify which VC funders are appropriate for the funding level you are seeking. For example, Paul Martino, the founder of Bullpen Capital, suggests the following:
- If you need to raise $500,000 or less, pitch your family and friends.
- If you need to raise less than $3 million, meet with seed capital funders. (Khosla Ventures, SeedIL)
- If you have less than $5 million in revenues, pitch to individual funders, accelerators, angels, and early-stage capital funds. Your best source for an updated list of angel funders is LinkedIn)
- If you need $1 million, it would be better to approach micro-VCs.
5. Build a Community
You may be an entrepreneur, but don’t go it alone. Build a community around yourself by joining digital and offline networks. Connect to other founders and funders on social media. Build this community before you make your first solicitation. Have someone from your network introduce you to the venture capital firm you want to approach. Take advantage of LinkedIn and Twitter to engage in pre-pitch conversations.
6. Put Yourself in the Investor’s Shoes
According to Clive Butkow, CEO of Kalon Partners, less than 1% of businesses successfully raise startup capital. Only 5% of investors continue past the executive summary. He says you must envision yourself as an investor. Review what you’re proposing and decide if you want to invest in your startup.
7. Create a Big Vision with Bite-size Objectives
VC funders are interested in founders with a global vision. You may be tempted to temper your imagination to create what you think is a more realistic presentation. Sarah Imbach, an angel investor, suggests that you break down your goals and objectives into bite-size measurable units but keep your vision big. Focus on how you’re going to change the world.
8. Temper Your Optimism With a Healthy Dose of Reality
Explain how you will weather an economic storm. What if you’re forced to delay the rollout of products or projects? Will you be able to ride it out financially?
9. Be Prepared
Microsoft Ventures managing director Lisa Nelson speaks about founders who cannot tell her their revenues from the previous year. For her, the door closes if the founder doesn’t have this information. How can they handle money from her if they don’t know anything about their finances?
10. Address the Risks
VC investors want to know that you’ve done due diligence to identify the risks to your startup, including direct and indirect competitors. Even if you’re in a narrow niche or the first to introduce a product or service, there is always the potential for losing customers to other businesses.
Be sure to include a competitor slide in your pitch deck. Identify less-obvious alternative solutions that may not appear to be a direct competitor but that your customers could quickly turn to when searching out the best value for money.
11. When Making Your Venture Capital Pitch, Be Specific
Now is the time to articulate exactly how much money you need to raise and how you will use it. Share your vision, display confidence, and present milestones.
12. Make Sure Everything is Working
The coronavirus pandemic shifted everything, including how we pitch to VC funders. In-person meetings have returned, but much of it remains online. If you’re going to make your pitch virtually, be sure to use reliable video communications technology.
Face-to-face is still essential, even if it’s digital. Be sure to test the system before going online. For example, if it’s going to be a Zoom call with your team members in different locations, be sure everyone is on the platform on time. Have them check that their speakers and video are working. You don’t want to look like an amateur.
13. Don’t Bring a Crowd to Your Venture Capital Pitch
Whether in-person or digital, keep the number of participating team members to a minimum. It can quickly get out of control with too many voices. Be sure your pitch is digital, and try to make it interactive so the VC team can have a hands-on experience.
14. Keep the Lines of Communication Open
All startups have successes and failures. You want your VC team to be your cheerleaders, to help you through the challenging hours.
15. Before Approaching, Engage in Long-term Visioning
What do you want your company to look like five or ten years later? Are you comfortable with the prospect of being sold, or going public, a decision likely to be made by your VC funders? Are your funders a group of people you want to be in a relationship with for the long term?
We’ll finish with these venture capital funding strategies from Crunchbase.
- Pick your funding mechanism.
- Focus on “why does this matter,” your numbers, and deliver a compelling demo.
- Start early and build authentic relationships with investors.
- Document your experience.
- Don’t forget to ask for human capital from investors.
- Stay persistent; take your fundraising efforts outside the box.
Please let us know what you think. Share your experiences with raising money. And don’t forget to subscribe to the blog for more business growth strategies.