So, you’ve got a great new tech idea that will revolutionize the industry, you’ve got a great team, and you want to get your product to market. But what’s the next step? How will you cover your costs? The answer is funding via venture capital.
Venture capital, in the most general of terms, is the money invested in a project where a substantial risk is to be expected. Venture capital is typically sought after for a new business or an expanding one. A venture capitalist is a person, group, or company providing the needed funds in exchange for equity or something similar.
This means that if you need funds to get to the next step in your business plan, you’ll need to raise venture capital. The question is how do you raise it? Here are a few tips to get you started.
Raising Venture Capital
What do you need, exactly?
Define your needs
You can’t just go up to a rich person and say “give me money, my idea is great!” You need to know what exactly you need to go forward – this means knowing what your company’s goals are. Use the SMART method to identify what your objectives are. Your targets must be Specific, Measurable, Achievable, Relevant, and Time-bound.
Build your plan
Once you’ve got your goals defined, build your business plan. You can download business plan templates from different websites. Keep in mind that your plan should be targeted towards venture capitalists; be concise, be specific, and get them hooked on your idea. Remember that you’re more likely to “catch” an investor with something you write yourself. Consider hiring a business advisor or a professional writer if writing is not your forte.
Identify your stage
Next, once you have your goals identified and your business plan solidified; make sure you identify the stage of your company’s development. Are you a brand-spanking-new business, or are you an existing one that is looking to expand? Different stages attract different investors – don’t waste time attempting to hook investors who may not be interested.
As mentioned above, you want an investor who specializes or is interested in your type of project and its stage of development. Some provide seed funds to brand-new companies, while others prefer funding a project for someone who is already established in the business world. Conveniently, there are investor databases you can use to see whose criteria for investment match your needs. Crunchbase and Investor Hunt are good places to start. A Google search can also yield results in your search for a venture capitalist.
Never consider calling up a stranger out of the blue or sending an unsolicited e-mail to request funding! Nobody enjoys dealing with a telemarketer, and those emails go to the junk folder. Your best bet for getting in touch with a venture capitalist is to use “warm” methods, such as networking, in-person introductions, and meet-and-greet events. You’ll need to be your charming old self and schmooze. If you find the social aspect of finding investors intimidating, consider hiring an advisor. He or she will most likely be able to introduce you to investors they’ve already got lined up.
And remember; be patient. The entire process for meeting a venture capitalist can take weeks. Schedule accordingly so that you’re not disappointed.
The pitch and pitch deck
You’ve got your business plan, you’ve got a meeting scheduled with someone who wants to hear about your project, and things are looking good. But now what?
Now, you’ve got to work on your pitch and pitch deck. This is the presentation you give to the potential investor. While some refer to this as the schpiel, you want to keep things short, concise, specific, and interesting. Most importantly, your pitch should contain data from your marketing research – never make things up on the go! Facts matter – and while writing your pitch, make sure that your values and vision align with those of the person you’re presenting to.
Another thing to consider is how much time you’ll have to make your pitch. Believe it or not, you might only have 20 to 30 seconds – the same amount of time as an elevator ride (hence the expression elevator pitch). If you need help composing your presentation, several websites provide advice on what to include. Practice your public speaking skills, and rehearse, rehearse, rehearse. The last thing you want is to finally have the ear of a venture capitalist, and have stage fright!
If the pitch and pitch deck seem intimidating, or if you’re short on time, hire an advisor to help out.
Negotiating and closing venture capital round
If you’ve made it this far in the game, congratulations! You’ve got someone interested in your project, and now it’s time to negotiate. While the negotiations and closing are far more complex than mentioned below, the following points touch on what you might expect.
VC Term Sheet
First off, if the investor is serious, they will present you with a VC term sheet, which will go over all the important aspects of the financing, or in other words, the terms. A VC term sheet also usually indicates that their funding committee has more or less approved the project. In most cases, businesses that receive this document end up closing the deal.
Next is the pre-money valuation. How much is the company worth before receiving funds? The money they put in might equal their percentage of equity post-money evaluation. Each valuation is negotiable and methodologies can vary widely. Generally, when the valuation is higher, there is less dilution for the entrepreneur. There is an entire range of factors that go into the valuation, which include market opportunity, founders’ experience, recurring revenue opportunity, the valuation of comparable companies, and the economic climate.
Form of investment
Basically, a venture capitalist isn’t simply going to hand over a bag of money. Investments can be via
- Convertible promissory note
- Simple Agreement for Future Equity ( also known as a SAFE)
- Convertible preferred stock investment.
Most first-round investments tend to be convertible preferred stock investments as both the investors and entrepreneurs benefit immensely. More information can be found here.
After the first round of negotiations is settled, there are still other things that must be considered such as the vesting of founder stock, a board of executives, how preferred stock will be liquidated, and the veto rights of investors. Stock option issues must also be managed, as well as redemption rights, information rights, insurance obligations, and registration rights. There are confidentiality issues to consider, and dispute resolution methods to discuss. As is evident, these negotiations are not for amateurs or dilettantes: venture capitalists have plenty of experience and corporation lawyers advising them. Seriously consider hiring an advisor or even a lawyer at this stage to represent you in order to protect your best interests.
Finally, venture capitalists will perform due diligence. In most cases, this step will be intensive, and if you’ve never experienced it before, it may feel invasive. However, keep in mind that they want to protect their investment as well and estimate their level of risk. Due diligence can include anything from your company’s financial statements, financial projections and litigation review to background checks on your founders. You must be transparent at this point, and for more information on what venture capital investors look for, there are examples of due diligence checklists online.
Even if you’ve got the best idea for a tech start-up and you’ve got the greatest team backing you, unless you’re independently wealthy, you’ll need funding to get your project to market. In order to hook a venture capitalist to fund your endeavor, you’ll need to put in a lot of work. Research potential investors, work on your social skills, network, write up your presentation, and most importantly, practice your pitch. In fact, this is where most entrepreneurs and salespeople agree: a great pitch can convince a venture capitalist to consider even a mediocre project or product. The pitch is where you should focus your energy.
However, the entire process of meeting an investor takes time, and when it comes time to negotiate and close the deal, you’ll probably want to hire professionals to ensure that you get the deal that benefits you the most. Never rush things, and don’t underestimate the negotiating power of your potential investors. Do your due diligence as well, and taking the time you need to get things right can only maximize your potential earnings and market growth.
For a more in-depth look at raising venture capital for a tech startup, a good place to start is Forbes Guide to Venture Capital Financings for Startups, and Crunchbase also has a downloadable pdf guide to venture capital financing.
Follow the above advice, and your search for venture capital funds will be easier and less confusing. Good luck!