Do you want to raise large-scale capital for your startup? Or are you looking to understand venture capital for future fundraising? We have put together a comprehensive guide on venture capital funding, where we will discuss what it is, its types, how to raise venture capital for startups, and the pros and cons of working with venture capital firms.
What is Venture Capital for a Startup?
Venture capital is the type of funding one can raise on a large scale. Venture capital firms offer finance to startups in return for equity rights. They are financial institutions that pool money from diverse HNIs and invest in startups in the hope of large profits to give to these HNIs and keep a part of it. Therefore, these firms conduct thorough research and due diligence before investing in startups.
Venture capital firms offer financial, advisory, and operational support to startups and help them perform well. They have industry experts who help startups better understand the market, adapt to market trends, and improve their operations to maximize profits.
Typically, venture capitalists invest in startups with established success or at least a well-researched minimum-value product. However, in promising cases, they might offer pre-seed funding (funding required to build an MVP, conduct market research, and more).
After a specific time, venture capitalists are likely to plan an exit. When venture capital gains enough profit from their investment or identifies a downfalling trend for the startup, they exit the investment. For this, they might sell their shares to investors, other venture capital firms, an IPO, or the startup owner.
Types of Venture Capital Funding
Following are the few types of venture capital startup funding you must know before raising funds for a startup.
1. Seed Funding
Seed funding is the type of startup funding raised when the company is in the ideation stage and lacks a physical product. Venture capital firms are likely to invest a small amount in this stage. Here, the investment gets utilized to build an MVP, conduct market research for product-market fit, improve offers, and more.
2. First Stage or Series A funding
The first stage, series A funding, is the most popular way to raise venture capital funding. Here, the startups have an MVP and conduct market research to sell their product. They need the venture capital for production, selling, and marketing the product. A practical and well-researched pitch deck and promising products will likely secure startup venture capital.
3. Expansion Funding
Expansion is a sign of growth and success. Therefore, you can seek financial support from venture capitalists to expand your business to new markets, tap new target audiences, and improve quality with high-end technologies. You can also contact your existing venture capitalists or other venture capital firms for more funds.
4. Late-Stage Capital
Successful startups with a track record often raise funds for many purposes. Such firms usually need to revamp their structure, need more working capital, or want to boost their production capacity. Therefore, they reach out to venture capital firms to improve their profits.
5. Bridge Financing
When a firm decides to pursue a Merger, Acquisition, or IPO, it often needs short-term financial support. Some venture capitalists might make such investments.
Raising venture capital funding might take up to 6-8 months. So, to raise funds without running out, you need to start planning. Let’s look at the process of raising venture capital for startups.
How to Get Venture Capital for Startups?
Here is the step-by-step guide to securing venture capital funding.
1. Find the venture capital firms
There are thousands of venture capitalists in the country and hundreds in cities. They each offer funding and specialized support. You need to identify which venture capitalists are a better fit for you. You can evaluate these venture capital firms based on their reputation, their expertise, their track record, and the competition you might face.
2. Initial calls and meetings
You can start by contacting venture capital firms to inquire about any investment opportunity they might consider. Try to set up a quick call or physical meeting to secure a spot for a chance to present your pitch. Create an elevator pitch to introduce yourself and briefly describe your startup and how they can benefit from investing in it.
3. Present your pitch deck
Prepare and present your pitch effectively. Your pitch must include factual data about your startup, business model, supporting market trends, the value you can provide them, and more.
4. Thorough due diligence
Prepare your papers related to startup, business approvals, and identity for due diligence. Here, they will thoroughly conduct a back check of your startup to ensure you are legitimate and that they avoid scams.
5. Negotiation of venture capital funding
Once they are sure about the potential of your startup and willing to invest, you negotiate. The venture capital for startups includes equity rights dilution. So, negotiate the amount they invest and the equity you offer to reach a profitable point for both. Avoid dilution of equity, which can cause you to lose the authority to make the final decision.
6. Finalization of the funding
Once the details about the startup funding get finalized, you create an agreement letter and legalize the venture capital funding.
Pros of Venture Capital Funding
Some benefits of opting for venture capital funding:
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Expert advice
You can directly access advice from industry experts on every startup stage. It helps you tackle any problem and identify market trends from which to profit.
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Free from repaying debts
In venture capital for startups, you offer equity in return for the investment. Therefore, you are free of any debts. So, you can continue working even if you face business losses without fretting about payback.
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No collateral needed
Unlike loans, you do not need collateral to invest in your business.
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Networking opportunities
You can access the network from venture capital firms and connect with industry people, including potential business partners, customers, or investors.
Cons of Venture Capital Funding
The following are the drawbacks of venture capital funding.
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Loss of equity
You lose ownership by a certain percentage due to the dilution of equity through venture capital funding.
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Performance pressure
To keep venture capital firms and their investments secure, you should perform well and show your potential. If your performance dips significantly, they may withdraw their investment.
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Dependency on venture capital firms
You need to include venture capital firms in every decision for the startup, which might cause delayed decision-making.
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Risk of conflict
There is a high risk of conflict with different goals and thinking. A significant conflict may result in investors pulling out funds.
Conclusion
Venture capital is for startups that need large-scale investment. A startup can raise venture capital funds at diverse stages of startup like seed funding, expansion, or when they need to grow more once they have established themselves successfully. It would help if you considered how much finance you need, the equity you want to offer, the expertise you need, and the reputation of the venture capital before deciding on the venture capital firms to raise funds. Raising venture capital funds includes finding the right venture capitalists, pitching ideas, due diligence, and final negotiation. The process might last around 6-8 months, so start early.
Networking can help you find the right firm and secure an investment through referrals. 21By72 can help you network well with investors to build business relationships with our Global Startup Summit, which has attendees from across the globe. Check our website to learn more.
FAQ
1. How long does it take to raise venture capital funding?
Finding the right venture capitalists and securing their funding takes 6-8
months.
2. How do you find venture capitalist firms?
You can look for reputed venture capital firms in your area or rely on your network to create a list of venture capitalists to secure startup funding.
3. How much equity do venture capitalists ask for?
The equity demanded by venture capital firms depends on the amount invested, the potential of the business, market trends, and more. Typically, the demanded equity might range from 10% to 30%.
