So if you are looking at raising venture capital you probably, have a killer venture pitch, a great executive summary, bootstrapped your business and have been through a round of angel money. If not, think hard before throwing your business into the lion’s den of venture capital. Raising venture capital is for those companies who need millions of dollars, who have already have proved their concept, gotten traction and probably have already raised angel money. Venture money is the influx of capital you need to scale your business to the masses. If you are thinking about scaling your business it should have already worked in your test market.
While raising big fancy round of series A funding may be sexy, it’s not always necessary. The Under30CEO methodology calls for keeping your startup spending under control, retaining your equity and finding innovative ways to bootstrap your business to profitability. We know however that this isn’t always possible.
Why You Need Venture Capital
The main reason to raise venture capital is if your business requires you to be first to market on a large scale. If a larger company can come through and take up all the market share, or competitors can pop up who are well financed and become the first movers then you should consider raising large amounts of capital. If you have a very small window to hit the market then venture capital may be the way to go.
Let us be clear, we aren’t talking about your average Joe startup here either. Just because you think everyone needs your product doesn’t mean you should spend a ton of money trying to get them onboard. The first mover advantage, isn’t always the best either. It takes a long time for most startups to find their sweetspot; think of Alta-vista, Ask Jeeves, and all of the other search engines who didn’t get it right. It is often the third of fourth company that comes along who finds a sustainable business model.
How To Find Venture Capital
As we’ve suggested in your startup guide to raising angel money, it’s time to look at you industry and see who has raised money. If there is a company you aspire to be like, reach out and see who has invested in them. Most venture capital firms will list the startups they have invested in on their website. You’ll want to find a firm who knows your industry. They will be more apt to invest if they understand your business already and will serve as better mentors because they’ll have experience and connections that will help you.
The best way to find a firm is to get an introduction from a warm lead. This will mean working hard to reach out to people who might know investors. If you see a firm who you want to target, reach out to the companies in the VC’s portfolio and ask them for advice. Maybe this will lead to an introduction. There are also websites that you can use to find venture firms including the National Venture Capital Association and Angelsoft.
Be sure you know what stage your venture firm invests in. Some firms invest in early stage companies while others don’t get involved until later in the game.
What to Watch Out For
- VC’s are out for blood. They want to see your business exit in the form of an IPO or acquisition. This is when they see their return on investment. They’ll try to steer your business in that direction which might not actually be the best for your company.
- Is your company going to be making tens of millions of dollars in the next few years? These are the types of returns VC’s are looking for.
- Be willing to relocate. Your VC will probably want to keep a close eye on your business or locate you in the place where you have access for the most talent for your industry.
- This won’t be a lifestyle business. VC’s will be expecting 100 hour work weeks and for your business to overtake your life. This is serious.
- Make sure you are ready. Don’t just go to a VC with an idea; getting a meeting with a VC is hard enough, don’t go to them until you are ready. The internet makes it incredibly easy to build a business, build your product first and then go blow the firm out of the water with a great presentation. VCs would rather see a great product than a great business plan.
- Find a VC who can be a great mentor. Some VCs are hands on while others are not. The most successful businesses have the most successful advisors. Be sure to look at who else is in their portfolio and see if you have any common synergies with the companies. Your VC will open you up to an amazing network.
- Raising money takes a lot of time! It takes some companies 20 presentations in order for anyone to give them money. This is time you could have been working on your business, so have a plan in place to keep your business up and running while you are running around pitching investors. If the process doesn’t work out you won’t want your business to have slipped.
- Have an experienced attorney to help you understand your term sheet.
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