Many people assume that VC funding is a complicated and annoying process, in which only software-related startups get selected. On the other hand, there are also business founders with great ideas who have no knowledge of its process, opportunities or advantages.
So the question is, how are we going to attract more people to the so-called startup ecosystem if we don’t let outsiders understand what VC is all about and how things in this world actually work?
In this blog post, we are going to discuss and break stereotypes about VC funding. If you are not new to this topic, forget about all the industry terminology you are used to because you are not going to see much of it here.
At its simplest level, Venture Capital (VC) is funding given to a startup in exchange for equity in the company. In this context, a startup can be defined as a relatively new company that is growing and in need of money to help accelerate its growth, while equity means a percent ownership of a company.
Any confusion about which kind of businesses receive venture capital backing is understandable: we frequently read about Apple and Facebook being founded in garages and dorm rooms before rising to prominence. These are amazing stories, but they also give the impression that all VC-funded companies are very small and immature, with a significant probability of failure. It's important to know that organizations that have grown to be highly successful might also need more funding, which is often done through venture capital as well.
Something that many people assume about VCs is that you can only seek funding if you are a software company or if you are building the next spacecraft. The truth is that many VCs do focus on specific verticals, BUT not all VCs do. If you have a great idea, team, and traction you very likely can attract funding. Bear in mind that, you could have a surprisingly good startup idea and you could even have a wonderful team working together to build a great product. That’s good for you, but for first-time entrepreneurs, if you don’t have traction, you may find it hard to attract VCs. Traction means having a measurable set of customers or users that serves to prove to a potential investor that your startup is in demand.
The higher the traction, the more investors are attracted to the organization. Consequently, the more investors, the more funds are available to help your business grow.
So, do your research and find which VCs would be likely to support you even if you aren’t focusing on artificial intelligence, or if you don’t have any traction yet.
The management team is also a very important aspect that VCs look out for, often more important than having a great idea. VCs point out that they see lots of great ideas but only a few teams that are capable of executing those ideas. When evaluating the management team, a venture capital investor often asks these questions: “Can these people carry out the plan they’ve described?” “Do they have the skills and experience?” and “Do they have the passion, drive, and character to do it?”
That’s why the perfect team to run an early-stage company is not necessarily made up of a CEO, CFO, CMO, and so on. Titles at this stage are not that important. A great team is a group of people who are experienced in the tasks and processes that the company is about to undertake.
Demonstrating that the business will target a large, addressable market is important for gripping VC investors' attention. Venture capitalists seek a competitive advantage in the market. They want their portfolio companies to be able to create sales and profits before competitors enter the market. The lower the number of startup’s direct competitors, the better.
Another thing that surprises many first-time entrepreneurs is the process. Yes, getting funded may take time, but it doesn’t have to take years. It is important to know that the process is not scary, and nobody is going to torutre you. You are the one that needs to pitch the startup to the partners and “win their hearts”. They will ask questions, but only things that you probably forgot to mention or explain. VCs have to make a lot of decisions with very incomplete information sets, and that’s why they are eager to get any data points you can provide.
Prepare a pitch deck and be ready to answer all topics below. However, don’t confuse yourself, thinking that it is an easy-peasy one-time meeting before you get your cash. You might need to be patient. Venture capitalists look at many deals on an ongoing basis and your startup is not the only one they have got on their hands. You might need to visit them several times and have documents sent back and forth but taking the time to do that is always worth it. It is also a test of your sales skills that you will need anyway to scale your startup.
Don’t be surprised if VCs seem to barely be able to remember what you told them in that last week’s conversation. They may even sit in pitch meetings and start typing on their phone after the second slide that you have shown them. And their eyes glaze over when you present that in-depth analysis that you have worked on for the past two weeks. “Why do VCs seem to have such a short attention span?” - you might think.
The reason is simple: they look at so many very different startups on any given day. Much of the information you present might be already known by the investors or they might find relevance in just 20% of the information you have prepared to share. So, be patient and think from their perspective.
VC decisions are irreversible, that’s the reason why they spend so much time on due diligence, which might require an examination of the financial records that you have or anything else that needs verification. Many founders consider it to be the longest part of the funding process and it is for a reason. For example, a founder can fire that salesperson that didn’t work out or change pricing if customers don’t like it, but a VC can’t simply pull out their money from an investment once it’s made.
A VC's job is to take risks. They want to know what they are getting into when they take a stake in an early-stage company. As they speak to the business's founders or go through the pitch deck, VCs will want to be absolutely clear about what the business has accomplished and what still needs to be accomplished. Could regulatory or legal issues pop up? Is this the right product for today or 10 years from today? Can they invest enough capital to fully enable the company to grasp the opportunity? Is there a foreseeable exit from the investment and what is going to be the return?
Once you get funded you will still need to talk to your investors quite often. They will sit on your board of directors, you will talk to them frequently, and you will need their full support, network and enthusiasm to raise future rounds and grow the business hand in hand.
Getting funded by a VC brings much more than one might think. Money aside, investors will also help you with strategic connections, they will guide you from experience and give you direction and support when needed. Communication is essential: talk to your future investors before you sign anything and make sure that you are on the same page in terms of values and goals. And with the right approach, you will meet the VC who’s made for you.