Let’s face it: Funding can help bring our small business idea to life. Unfortunately, one of the biggest challenges that you will face as an entrepreneur is financing your startup.
For one, the funds you acquire for bootstrapping may not help sustain your business. Second, it is not all the time that a bank can grant a startup with a business loan.
Hence, many aspiring entrepreneurs would turn to venture capitalists for funding. These are well-off investors and investment banks that provide financing to startups.
From preparation to pitching, here are six tips you can follow to raise venture capital funds for your startup.
Michelle Dipp, a female leader in venture capital funding, points out that VCs would be interested in two things:
- The value of your business
- The potential return on investment
Thus, you must do your homework as a startup founder. This includes determining how much your business is worth.
To do that, you need to consider the following factors:
- Your startup’s age
- Growth rate
- Senior management team’s experience
- Revenue and cash flow
- Patents and other intellectual properties
- Existing active users or customers
Company valuation requires complicated math, but that should not push you to make a ballpark guess. That’s because a VC is likely to seek the help of a professional appraiser to verify your startup’s potential.
The reason you want to pitch to an investor is to raise funds for your startup. But are you confident with the amount of money that you need to raise?
Aside from that, this can determine how much control you are willing to cede to your potential investors. After all, a venture capitalist will seek to get the maximum ROI. This means that if they invest $500,000, they will ask for a smaller stake than when they invest $1 million.
That said, you need to determine how much capital you will need immediately, how you intend to use it, and how much stake you are willing to give up. You should also consider whether a VC would allow you to buy back your shares.
In relation to determining how much you need, you should also ascertain how much business stake you are willing to cede. This will depend on the following factors:
Sole proprietors often have a direct offer. However, it is different when you have a team of founders and technical experts (i.e., engineers and software developers).
Thus, you may want to offer equity to keep your team motivated. For instance, your team can share a 20% stake in your startup. However, this also means that you may have less to offer to your VCs.
Venture capital funding is often the first round of startup investment. Down the line, you might need to seek help from other institutions or merge with a competitor.
When you give away a significant stake during the first round, this could mean less investment leverage in the future.
That said, experts advise that you should retain at least 25% ownership. The remaining 75% can split up among your founding team, other partners, and venture capitalists.
If you are not ready to have someone take over your startup yet, we recommend retaining at least 60% ownership.
Once you determine your startup’s value and the amount of capital you need, the next step is to look for a VC firm.
You can reach out to a CPA, financial advisor, or lawyer for recommendations. You can also attend a private equity conference to start networking with potential investors. That’s because raising funds through venture capital firms begins by fostering meaningful relationships.
Say you were able to build a relationship with relevant investors. The next step is to prepare for a pitch.
However, pitching to VCs is not as simple as setting up a presentation deck. You need to prepare for this.
For one, you need to separate your startup from a sea of competition. That’s because they often receive hundreds of proposals a month for startups asking for financial assistance. Thus, you need to position your small business and ensure that it is a worthy investment.
Once you are in front of investors to pitch, remember to keep it short and sweet. Adhere to the facts and keep your pitch concise.
Lastly, you should know what a VC deal entails. That’s because an investor will always look for a way to protect their investment if something goes wrong. Meanwhile, they would want to maximize their benefits should a startup be proven to be successful.
Hence, raising funds for your startup is not as simple as seeking a $1 million aid in exchange for 20% ownership. Some would ask for downside protection, allowing them to get first dibs on assets and technology if the startup collapses.
This also means that you need to consider a lot of things before signing a deal. But through this post, you now have an idea of how you can work around your investment pitch.