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At its core, venture capital financing (also known as venture capital funding or VC funding) is risk-equity investing through funds that are professionally managed and provide seed, early-stage and later-stage funding to accelerated growth companies. Venture capital funds provide an important link between finance and innovation and are intended to propel a product's success or growth in the marketplace. The main benefit to venture capitalists (or VCs) is multiple returns on their initial investment.
Aside from the infusion of cash, the other key advantage of obtaining VC funding includes the relationship with the individuals at the venture capital firm. The right firm may serve as an important partner and resource, may expose its portfolio companies to an established network, provide expertise and guidance at the right time and help instill a healthy sense of urgency and discipline in the founders. Each year, the more established VC firms typically hear thousands of pitches from prospective companies who are trying to secure funding. However, a very small percentage of these companies actually secure any funding at all. Needless to say, securing the right kind of venture capital funding for your business is no easy task.
To maximize the likelihood of success, it is highly advisable for capital-seeking business owners to perform advance research to learn about the venture capital process, which includes the following:
It's important to prepare well for your initial meeting with a venture capitalist so you can make a positive first impression and secure a follow-up meeting. VCs are rather experienced and sophisticated, so you should undergo substantial internal planning in anticipation of becoming a portfolio company. Here are some steps to take:
1. Form a Business Entity
One of the first steps you should take when you're interested in moving forward with an idea is to form a legal entity. Delaware general corporations with "C" tax status, are the most popular choice for accelerated growth companies that are positioning themselves for VC funding. There are many reasons why founders all over the world form their accelerated growth companies in Delaware, including establishing a U.S. presence and accessing U.S. capital, the consistent body of business law opinions that have been issued by the Delaware Court of Chancery and laws that tend to support the good faith decisions of management over the demands of shareholders, among other reasons.
2. Enlist Legal Help
After formation, you should work with an experienced business lawyer or use a reputable online resource, such as Startup Documents, to generate your post-incorporation corporate document set, which should include the following:
3. Build a Stellar Team
Venture capitalists will often stress that products serve to spark their interest but the management team drives the deals forward. Make sure you summarize your experience and expertise in a compelling way so that investors have confidence in your company's potential success. Many of the most successful startup founders didn't have to reinvent the wheel; they were consistently determined, focused, unnerved and worked exceedingly well with others. VCs won't want to invest in founders that have a one-track mind, don't listen, are desperate or greedy or are otherwise difficult to work with.
4. Be Committed to Your Product
Being only partially committed to your product or company will reflect poorly to investors, employees, other team members, and customers. Be fully committed at all times and, when it comes to your product, become an expert! It's far more valuable to have a good product and a great team, rather than a great product and a mediocre team. As I mentioned above, you don't have the re-invent the wheel. In fact, there are plenty of successful entrepreneurs out there who don't launch truly innovative companies. Your 1000 percent commitment to hard work, determination and the willingness to learn and iterate will likely make your product a success.
5. Be Prepared to Back Your "Hockey-Stick" Diagrams
Founders often end their pitches to venture capitalists with "hockey-stick" diagrams, which illustrate dramatic upswings in profits and valuation over a period of a few years. Whether or not it's realistic, experienced VCs will see this as a naive attempt to inflate your company's value and will often just be annoyed. Don't end your pitch on this note. Be prepared to back up your numbers and don't rely on other companies as a blueprint for your own success. Many venture capitalists prefer to use their own judgment to determine how long it will take your company to have the kind of returns that are of interest.
6. Get Some Traction First
Venture capital firms have an expectation of multiple returns on their investments. To that end (and to play it safe), they are not likely to invest in a company that is not profitable and can show no significant customer traction. The entire point of fundraising at the venture capital stage is to accelerate the growth of your company with an infusion of cash and to provide the investors with an attractive return or exit strategy. VCs aren't often interested in the wait-and-see approach to investing. They want some results now and much more later on.
7. Take an Active Approach
If your only goal going into a meeting with a venture capitalist is to get funding, you'll probably walk away empty-handed. Make sure you use your meeting time wisely and interview the VC to determine whether or not they are in fact the right fit for you and your company. Some venture capitalists insist on having a board seat as a condition of their investment and others prefer to take a less active approach to their portfolio companies. Ask for introductions to other venture capitalists, advisors, potential customers, or other individuals who may be helpful. Established VCs are well-connected and you shouldn't be shy about asking for key introductions.