Whether you’re in the phase of launching a new idea or your startup business is already up off the ground and expanding, promoting your company and raising more money is crucial to the success of your business. Venture capital funding is one of the ways to raise money from interested investors, who negotiate and buy shares in your business.
Venture capital series
Part of the process of venture capital is moving through a round of funding from investors. Capital is raised through each of these rounds, with early investors moving into the next series so they can maintain the share they have in your business. Here’s a closer look at series A, B, and C funding:
The first round of financing, Series A, happens when you first decide that it’s time to offer company ownership to outside investors. To do this your company portfolio will need to show that there’s value in your business and what you do. The value of your startup is based on several factors, including being able to prove that your business concept is viable, that you’ve seen some success with the seed capital you’ve already acquired, and the current market size of your company compared to the rest of the industry.
Once you’ve passed through Series A and need more capital to achieve company growth, you’ll move into the next round, Series B. The main goal of this round of funding is not only to break even, but also to see some net profit. The risk for investors is lower in this round, with funding usually being higher than in Series A. The factors that go into the valuation of your company during Series B will include how you’re performing in comparison to similar companies in the industry and a forecast of future revenue.
Venture capital investors will consider Series C funding when your company has shown that it’s successful in the market. You’ll be ready for this round when you’re looking for more acquisitions and a larger market share or if you want to develop more products or services.
Choosing the right venture capitalist
When looking for a venture capitalist, it’s important that you identify and choose the right one. Do your research by checking the bio of partners in venture capitalist firms that you’re considering. What’s their background and what startups have they funded? You can also use tools such as Crunchbase or Venture Deal to find VCs in your market industry.
Once you’ve narrowed down a list of VCs who may be a good fit for your company, you’re ready to start the process of introduction and pitching your company profile to get the interest of these potential investors. The two ways you’re going to do this are with a warm introduction and, if investors want to know more, with a pitch deck.
The best way to meet future VCs is through an introduction by another entrepreneur or from your early investors. Finding another entrepreneur who is excited about what you do is going to able to convey this excitement to a VC. The same can be said for your early investors – they’re already onboard with the potential of your company.
After the warm introduction, if a VC is interested, you’ll typically be asked to prepare a presentation, otherwise known as a pitch deck. Your pitch desk is much like an effective sales pitch – it gives potential investors information about your company. Some basic rules for a pitch deck include:
- Prepare a full pitch with all the details as well as a shortened pitch that summarizes the highlights.
- Have physical copies available.
- Hire someone to create a professional and well-presented pitch.
- Avoid using business metrics that have no meaning to your business.
- Include money information – how much investment are you looking for and what will the money be used for.
When a VC decides to invest
Once a VC has decided to invest in your company, the next step is the term sheet. This is a non-binding agreement between you and the VC that outlines the conditions and terms of the investment, including voting rights, investor rights, and board composition. Term sheets can be extremely complicated to understand so it’s best to have your lawyer review and negotiate on your behalf.
The information here is just the start of what you need to know when your startup is looking for a venture capitalist. If you’re looking for a sizeable amount of money from investors, venture capitalists who belong to the private sector will usually take on a more active role in startups and are ready to invest millions of dollars into rapidly expanding companies such as yours.