Here are three things you should know about raising venture capital if you’re looking to raise some money for your business.
If you have a growing startup, chances are, at some point, you will be looking to raise venture capital. Unlike angel investors, who usually write small cheques between $10,000 to $100,000, VCs can write multi-million dollar cheques.
Because VCs deploy large amounts of capital and in turn, expect high returns, the process of raising money from these kinds of investors is far from a walk in the park.
Here are three things you should know about raising venture capital if you’re looking to raise some extra capital:
Your business has to be VC-backable: The thing is, most founders have incredible ideas and they believe those ideas are worth investing in. But the reality is that most ideas are worthy of some kind of investment, just not necessarily a venture type investment. Different businesses have different kinds of potential and that determines the amount that makes sense to invest in them. For example, a restaurant can get investment in the form of a bank loan, but it will not get venture investment because the returns are typically small. Understanding the size of your market and how VCs typically like to invest is an important thing to do for every kind of business.
Fund cycle and pace: That a VC does not commit to investing in your business does not mean they don’t think it is worth investing in. Sometimes, the partners at the VC firm you are talking to have deployed all the capital and are in the process of raising new funds. Also, VC funds have a specific pace with which they deploy capital. For example, a fund may do two Series A investment per quarter which makes it highly unlikely it will do another one in the same quarter. This kind of situation is not obvious to the founder but as a founder you should always ask how many investments a fund typically makes per year or per quarter, as the case may be.
You may need a “warm” introduction: One basic litmus test that venture funds run on founders is to see whether a founder can get an introduction to the fund through a network. Cold emails or VC stalking could do it for you (occasionally) but these days, VCs expect founders to use their networks and get an introduction. VCs do this because it checks three boxes: understanding of how the VC works, ability to hustle to get an introduction, and a trusted connection through someone who already knows the founders.
Raising money from VC’s is not “beans” as they say. But if you have the right information and know the right steps to take, it is way easier. Happy hunting!