Are you looking to raise VC funding for your digital startup? Unfortunately, getting cash necessitates far more than a fantastic product. Aside from ticking the boxes of a typical pitch, founders must find a method to engage with potential investors on a personal level.
Before tech startup founders contemplate pitching to investors, you must make several crucial choices before tech startup founders consider pitching to investors.
In this post, we'll provide you with some recommendations as you prepare to acquire venture capital, but first, let's look at the various other funding sources.
What are the Top 7 Sources of Small Business Funding?
1. Personal Investment
When starting a company, your first investor should be you—either with your own money or with assets as collateral. It shows investors you commit to your projects for the long term and will accept risks.
2. Love Money
Love fund is money your spouse, parents, family, or friends have loaned you. Investors and bankers refer to this as "patient capital," or money that you will repay when your company's profits rise.
When borrowing love money, keep in mind that:
- Usually, family and friends have little money.
- They might be interested in owning a portion of your business.
- Having a business relationship with a relative or friend is not a good idea.
3. Angel Funding
These are wealthy individuals or retirees who invest directly in small businesses. They usually have a wealth of experience, connections, and technical and management expertise. They typically invest between $25,000 and $100,000.
Their money is at risk, so they are entitled to oversee its management procedures. It often implies a seat on the board of directors and promises of openness.
They generally serve the high-tech industry by aiding start-up companies through various stages of development. Incubators for local economic development focus on subjects including job creation, revitalization, and hosting and sharing services.
Future enterprises and other start-ups are regularly encouraged to share their buildings and administrative, logistical, and future technology resources. For example, an incubator can share its facilities with a startup company to develop and test its goods more cheaply before launching into production. In most situations, the incubation period can last up to two years.
5. Grants and Subsidies from the Government
Government agencies may provide financing as grants and subsidies to your company. However, they can be scarce. There is competition, and award criteria are often tight.
Most of them require you to match the funds given to you, and the amount you have to check varies depending on the grantor. For example, a research grant may only need you to contribute 40% of the total cost.
6. Loans from Banks
These are the most common sources of finance for small and medium-sized businesses. Consider that each bank offers its unique set of advantages, whether individualized service or customized repayment. Ensure you shop around for the most acceptable bank for your needs.
Bankers, on the whole, prefer businesses with an established track record and excellent credit. It is not enough to have a fantastic idea; you must also have a solid business plan to back it up. Start-up loans will also ask the firm founders to provide a personal guarantee in most situations.
7. Venture Capital
High-growth enterprises or organizations with strong cash flow are the best candidates for venture financing. Nonetheless, each investor has a geographic sector and the company's age niche.
Here are ten key strategies to getting funding for your small business if you're interested in raising venture capital, but first, let's look at how you can prepare for VC funding.
How can I prepare for VC Funding?
1. Understand the concept of venture capital
What is venture capital? - Venture capital is money given to startups and small enterprises by wealthy investors or investment banks that believe they have a lot of room for growth. A venture capitalist's help or financing may not always be in the form of money; some choose to contribute expertise or management. A venture capitalist typically invests in a small business in exchange for equity or a say in company decisions.
Generally, you reserve venture capital money for high-risk, high-growth businesses. Here are some of the benefits of venture capital funding for your small business.
2. Determine whether or not your company is ready to seek VC funding.
The best time to contact VCs for funding for each company is different. Although attracting a VC partner with just an idea is conceivable, you never finalize the majority of agreements until a company has three solid items:
- A Founding Group
- Minimum Viable Product (MVP)
VC is intended toward businesses with significant launch expenses and a desire to increase. Ideally, you'll need an innovative idea in a field where VCs spend significantly, such as technology, and an impressive management team to get venture capital funding.
3. Make a presentation and a pitch deck.
A great pitch deck will be your calling card and the beginning point of most first meetings if you're seeking to raise money from a VC. A pitch deck is a visual presentation that gives a high-level summary of your company. The deck might provide information on your product or service, business model, market opportunity, financial requirements, and management team.
A pitch deck should be short and to-the-point, and it should include the following elements:
- Management Group
- Problem and Solution in the market.
- The development of the company.
- Amount of the investment.
- Financial statements of a company.
According to Vikas Agrawal, the significance of a presentation cannot be overstated. The visuals of your presentation will determine the majority of your success in convincing people to invest in your idea. So set aside enough time to create a compelling pitch deck. Avoid utilizing text-heavy slides and keep visual visuals to a minimum to focus on the founders and the company.
Keeping this in mind, you should prepare a short presentation version. You may speak for a set amount of time and explain your idea and model to possible investors; the rest is up to you to break down complicated concepts using visuals and charts.
What are the Five Stages of VC Business Funding?
The five stages of venture capital fundraising are as follows:
1. Seed Capital
The firm is merely an idea for a product or service at this stage, and the entrepreneur must persuade the venture capitalist that their idea is a good investment.
If the company has growth potential, the investor will fund early product or service development, market research, a business strategy, and the formation of a management team. Other investors, as well as seed-stage venture capitalists, participate in additional investment rounds.
2. Startup Stage
The startup stage necessitates a considerable cash infusion to help advertise and market new items or services to new customers. The company has conducted market research, created a business strategy, and has a prototype of its products to offer investors at this point. At this point, the company takes in more investors to give extra funding.
3. The Early Stage
The company is usually ready to begin the actual manufacture and sales strategy plan, necessitating a more significant investment than in prior stages. Most first-stage companies are young and have a commercially viable product or service.
4. Expansion Stage
The company has already begun selling its goods or services and requires extra funding to meet demand. This money is needed to support market expansion or start a new line of business. The funds might potentially be utilized to improve products and expand the plant.
5. Bridge Stage
The bridge stage represents the move to a public corporation. The company has reached maturity and requires funding to support acquisitions, mergers, and initial public offerings (IPOs). At this point, the venture investor can depart the company, sell his shares, and profit handsomely from his investment. The venture capitalist's exit permits new investors to enter, hoping to profit from the IPO.
Importance of Funding
If your company receives venture capital funding, it indicates a high likelihood of rapid growth and profitability. Here are a few more advantages:
- Your venture capital fund's business knowledge and relationships can assist you in growing.
- You might get millions of pounds in capital for your company at no cost to you.
- The average VC investment lasts five to seven years, providing your company plenty of time to grow and mature.
After you've grasped the concept of venture capital, you'll need to devise tactics to entice investors to invest in your company.
How to get a venture capitalist to invest in your business?
1. Make your company marketable.
Are you ready for the spotlight? Is your story interesting enough to pique the curiosity of venture capitalists? Even if they thrive, some businesses will never become large enough to provide the kinds of returns that venture capitalists desire.
Do you have a track record of success?
Is there any customer traction?
Intellectual property with a patent?
Consider obtaining a small amount of money from angel investors or friends and family to attain key milestones that will make your company more marketable to venture capital firms.
2. Prepare documents.
Prepare the following three documents:
- A presentation.
- A well-thought-out business plan.
- A one- to a two-page executive summary of the business plan.
The pitch is the movie, and the business strategy is the screenplay. Please don't make the plan overly elaborate or formal because it won't last. It should last no more than two to four weeks.
Don't believe the rumor that investors won't read your business plan. The truth is that investors will reject your business if they don't read your strategy, but they won't invest in it if they don't read the plan. No corporation can receive funds without first conducting extensive research and investigation (known as "due diligence"), and the program serves as the active document for due diligence.
3. Form your core group.
It is crucial for you to explain your background and experience and who has joined the team to investors. And who will most likely join the team? Is there any money or "sweat equity" n the company for the founders? You want to show investors that you have the kind of dedicated team members that can help you take the following steps toward your goal.
4. Assemble a group of advisors.
Whether it's board members, attorneys, accountants, professional investors, or industry professionals, surround yourself with skilled advisors who have expertise in raising venture funding.
5. Create a list of possible targets.
Create a target investor list based on the following criteria:
- Industry Sector
- Investment Stage (i.e., Seed, Series A, B, C, etc. )
- Geographic Proximity
- Amount to be Funded
- Portfolio firms that are comparable or competitive
- Possible investor contacts
Find out about your target investors' current investment status and activity level as much as you can.
6. Make sure you practice your pitch.
Find a supportive audience (at least one experienced investor) who can assist you in identifying gaps and flaws in your proposal—practice in front of a mirror. Make sure you have a 30-second, three-minute, and fifteen-minute version ready.
You must be able to communicate your vision clearly and succinctly. When giving presentations, space them out to incorporate criticism and suggestions into future proposals.
Know your competition and be ready to set yourself apart with your business approach. It is incorrect to claim that you have no competition.
8. Make sure you're familiar with your capitalization table.
Ask someone to explain the basics of a corporation's capitalization if you don't grasp them. Make a comprehensive capitalization table. Know who owns what percentage of your company's shares.
Avoid vague, open-ended, or ambiguous equity pledges, such as offering someone a portion of the company. Don't forget to write down your equity arrangements.
The Final Note
Venture capital funding can be critical to a startup's success. You'll have a better chance of getting total VC funding from reputable investors if you plan and prepare well. You'll also have a better chance of a good outcome if you plan and understand the critical challenges in venture financing.