You’ve turned your innovative idea into a startup company. You’ve gotten this far by using your own money and perhaps funds from an angel investor, but in order to achieve your dream and take your idea and company to the next level, you’re going to need some serious investors. One way to accomplish this is by using a venture investment.
What is Venture Capital Investing?
Venture capital is a good way to finance and scale your company without taking out a loan. Instead you take on interested investors who, when they invest with you, are buying a percentage of your company and rights to company profits. Venture capitalists typically provide financing to small businesses and startup companies that have the potential for profitable long-term growth.
By taking on a venture capitalist, the goal for you is that with enough money to grow your company, those profits are going to be sizable. Rather than being 100% owner of a company with net profits of $100,000 per year, you could be a co-owner with venture capitalists of a company that nets millions of dollars a year.
Seed and Series Funding
Most startups begin with seed funding. This is when your business is either still an idea or in the development phase and not yet profitable. This seed money is used to take your business plan and move it through to the next stages of Series A, B, and C funding:
- Series A – Funding at this stage helps you scale your company and refine your products or services. This is the stage where your company is defining its value.
- Series B – Venture capitalists in Series B funding are providing finances for your company to continue to grow, see net profits, and get an edge on your competition.
- Series C – Your business is now growing and continues to generate revenue. You may be ready for more financing from venture capitalists to expand even further, develop more products, or acquire smaller startups.
What Venture Capitalists Are Looking For
Before approaching a venture capitalist, it helps to know that they’re looking for in the companies they choose to invest in. The main criteria include:
- Targeted industry sectors, such as software, biotech, or SaaS.
- Geographical location of a company.
- Stage of the business – is the company in the early-seed stage or already in Series A rounds.
Before contacting venture capitalists, try to determine if their focus and interests are in alignment with your company and where you are in the startup phase. Once you have one or more investors who have potential you can contact these venture capitalists using the right approach.
Venture capitalists are approached all the time with opportunities for investments. If you want to get the attention of these investors and secure funding, follow these steps:
Introduce Your Startup
Use a warm introduction, which is all about the referral of your startup to interested venture capitalists. The most effective way to get in touch with investors is through a contact, such as another entrepreneur or an interested colleague.
A Sales Pitch
When an investor shows interest, it’s time to promote yourself and what you do. You’ll need to develop a strong sales pitch to keep their interest. Also called a “pitch deck,” this is how you’re going to gain traction and let potential investors know what you’re all about. Make sure you have physical copies of your pitch deck and that it’s well designed with a lot of attention to detail.
Venture Capital Term Sheet
If a venture capitalist is serious about investing in your company, they’ll prepare a document known as a “term sheet.” Although not binding, nor a guarantee that the investment deal will be completed, a term sheet clearly outlines the important points of the financing. Details that may be included on a term sheet include:
- The type of preferred shares an investor requests, such as shares with no voting rights.
- A condition that investors will receive their initial investment if the company sells for a lesser valuation.
- Compensation stipulations for the board and employees.
- What voting rights investors have when it comes to company issues.
- Rights allowing the investor to force other shareholders to vote in the event of a possible sale or merger.
Using venture capital funding can make all the difference to the success of your startup business. Understanding the important points of financing with a venture capitalist can help you reach a successful outcome with your investors so you can scale your business and take it to the next level.