Significance of Venture Capital Funds in Modern Business Funding

When the time comes to acquire funding for your business, there are several roads you can take. The process of acquiring business funding refers to navigating the various ways you can raise capital to fund your operations and scale your business.

 Business or capital funding enables startup owners to finance their business activities without having to face any cash flow hiccups. One of the most solid ways to secure funding for your startup is through venture capital funds.

 Venture capital (VC) financing is a type of financing that investors provide to startups that show long-term potential for growth. The source of capital here generally comes from high-net-worth individuals and other financial institutions. Aside from offering a massive capital boost, VC funding also brings technical and managerial expertise to the table. A few of the most valuable VC-backed companies include WhatsApp, Facebook, Groupon, SpaceX, and more.

 Why Do Startups Need VC Funding

VC investments have the power to transform small-scale startups into industry giants. Here are several reasons startups need VC funding to expand:

·       Gaining significant amounts of capital. Generally speaking, startup loans cannot exceed an amount of $5 million. In contrast, VC funds can range anywhere between $100,000 to over $25 million.

·       No more monthly payments. VC-backed companies don’t have to deal with loan payments. The venture capital model involves investors pouring money into a startup with the goal of gaining equity when the business is sold.

·       No risks to your personal assets. Unlike loans, VC investments don’t require you to pledge collateral when receiving the funding for your business.

·       Networking opportunities. Quality professional connections are critical to building a successful company. VC firm partners spend a great deal of time letting their networks know about the companies they’re investing in. This, in turn, helps startups raise future funding rounds, hire high-performing employees, craft new partnerships, and more.

·       Access to valuable advice from experienced leadership. Experienced investors often act as strategic advisors to the companies they invest in. This helps a portfolio company make sound decisions, avert financial risks, and receive valuable advice to run their operations.

·       Publicity boost. Most venture capital firms come with solid media contacts. Many have a public relations department as well. This helps portfolio companies get noticed by a larger base of clients, customers, employees, and partners.

 How to Get Venture Capital Funding

Acquiring the right venture capital funding requires a well-researched step-by-step approach. Here are a few steps to help you navigate the process:

 Analyze Your Company’s Performance

VC firms only invest in companies that show exceptional growth potential. Analyze how well your startup has been performing since its starting point. Do you have a solid team in place? Do you possess secure sales channels? Is your brand well-established? How fast and how well can you scale once you receive the capital you need? Understanding where your company stands at the moment can be a huge determinator in terms of whether a venture capital fund would want to invest in your business.

 Identify Your Target VC Investor

Before you decide which investors you’d like to approach, it’s critical to perform some research. From fintech to green technologies – each VC firm has its own specific interests. Make sure the investors you’re seeking have interests that match those of your startup.

 In addition, different VC firms supply different volumes of capital to portfolio companies. For instance, you don’t need an investor who deals in several million dollars when you’re looking for an investment of $500,000.  

 Shortlist Your Investors

Once you’ve navigated the market and performed thorough research on your potential investors, it’s time to create a shortlist. Regardless of the number of investors you have selected, it is critical to reduce your list to a total of 5-10 candidates. Having more than 10 investors can make the process difficult to manage, especially if you start to receive a lot of interest.

 Approach the Investors in Your List

If you already know someone at one of your target VC firms, this will enable you to set up a meeting more quickly. But if you don’t have this advantage, you’ll have to find ways of connecting with your investors. Attend certain events where your investors might show. Head to LinkedIn and find out if your target firm could be connected to any of the people you know. You can even send an email to each VC you’ve shortlisted. While this approach doesn’t always bring results, creating an email that stands out from the crowd can help you grasp their attention.

Negotiate

Once you find a VC firm to collaborate with, it’s time to discuss the terms of the agreement. This can be done using term sheets, the non-binding and preliminary agreements that lay out the main terms of a venture capital investment before anything becomes official. Three of the most important sections of a term sheet include:

·       The funding section which lays out how much a VC firm is prepared to invest

·       The corporate governance section which lays out what powers VCs, co-founders, and other stakeholders can exercise

·       The liquidation and exit section which covers the next steps if a company is liquidated, acquired, or dissolved.

 How to Find a Venture Capitalist

Finding the right venture capitalist demands tons of research and networking. Here are a few ways you can go about the process:

·       Investor databases like Visible Connect

·       Venture capital associations

·       National Venture Capital Association (NVCA)

·       The Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program

·       Online VC lists and databases

·       Social media platforms like LinkedIn

·       Networking events

 Factors to Consider in Choosing the Right VC to Fund Your Business

Finding the right VC requires answering five critical questions:

·       Does my target VC firm invest in similar companies?

·       What is my business valuation?

·       Does my potential VC match my business’s funding stage?

·       What is the VC firm’s history?

·       How highly rated is my potential VC firm?

·       Where is my potential VC firm located?

·       What else will my startup receive from a VC investment aside from capital?

 How General Partner Evaluates the Startups to Invest In

The General Partner (GP) in a VC investment pulls most strings in terms of how the fund operates. A GP decides which portfolio companies to invest in and manages the venture capital fund throughout its lifecycle. Here’s how a GP evaluates a startup before investing in it:

·       The startup’s market size and growth. The larger a company’s market size and growth, the more scope it will have to expand.

·       Team quality. GPs often choose companies with teams that have the right skills, experience, and vision to make sound decisions, overcome challenges, and build a great venture.

·       Product traction. Product is naturally the king. A GP would choose a company with a product that is unique, scalable, and powerful enough to solve the most pressing and urgent problems of its customers.

 How Venture Capitalists Bring Value Beyond Funding

Aside from contributing significant sums of capital, VCs play a pivotal role in leading a startup towards its success. Here are the valuable things they bring to the table beyond capital:

·       Experience, expertise, and guidance

·       Strategic planning

·       Networking opportunities

·       Scaling support

·       Operational backbone

·       Financial management

·       Exit strategies