Raising venture capital (VC) requires the consideration of the value of your business, amount of funding, business goals, and relationships with investors. It can be challenging to find venture capitalists who will invest in your business, so be sure to determine if it’s a suitable option before proceeding with seeking investors and the following steps. We’ll guide you through how to raise venture capital, from valuing your business and preparing your presentation to identifying your investors and closing the deal.
Key takeaways
- Raising venture capital can be a competitive and lengthy process in finding and negotiating with eligible investors.
- In exchange for funding, venture capitalists typically are offered an equity stake in the business they invest in.
- If you choose to source venture capital funding, you’ll need to find VC investors who have ample access to capital, have industry experience, and can support your long-term business goals.
Step 1: Value Your Business
Valuation of your business is a crucial element in preparing to promote your business to investors. It will play a part in the amount of venture capital you receive for each funding round—generally the higher the valuation, the higher the amount of funds you can raise. Determining the value of your business can be done in several ways and by a variety of factors, such as time in business, cash flow, and growth projections.
However, ultimately, there’s no traditional formula for valuation, and your calculations will likely be used as a guide rather than fact since investors usually have their own methods of valuing a business. Valuation methods will be unique to each business, but overall value will usually be driven by the market.
Step 2: Determine Your Financing Needs
When determining your financing needs, consider these factors:
- The current financial status of your business
- How the introduction of VC funds can help you achieve your long-term goals
- How the funds will be spent and the timeframe in which you plan to use those funds
- If equity financing is a better alternative than debt from a startup business loan
- If offering equity stakes aligns better with your goals than a monthly loan payment
If you do choose to partake in equity financing, you’ll come across the concept of dilution, which means the amount of ownership that will be exchanged with investors. The more funds you accept from investors, the more diluted your ownership stake in the business becomes.
You’ll need to keep this in mind when determining the amount of your funding request as it’s standard for investors to want at least a 20% ownership position during the initial rounds of funding.
Step 3: Check Out the Market & Define Your Niche
You’ll want to stand out from the crowd when courting VC investors. Given, your product or service should be something that is in demand and sets you apart from the competition.
That being said, it can be tough to find investors willing to take a chance on a business in a saturated market. So, you’ll likely need to find a VC firm looking for specific products or services within your industry.
Funds can be raised beforehand if a VC firm has a particular interest in a type of product—keep this in mind before looking for investors and ask yourself if you may fit the bill.
Step 4: Put Your Presentation Together
You’ll need to prepare a presentation that represents your business plan; see our guide on how to write a business plan. This includes your pitch to potential investors and the various elements that outline what you offer, your company goals, how you’ll utilize investment funds, and how you fit in the current market. Creating a pitch deck is an ideal way to showcase your request and do so in a concise and timely manner.
References from business connections and customers are a great way for VCs to validate the valuation of your business. You should compile a few to be at the ready in the instance your potential investors may ask for them.
A few key talking points to include in your pitch are:
- Who and what does your business serve?
- What problem does the services or products you’re offering solve?
- What’s the market need for your product or service?
- What sets you apart from competitors?
- What’s the structure and size of your company?
- What’s the timeline of your goals?
- How much funding will you need to profitably grow?
- What does future company growth and financial performance look like?
Alongside your presentation, it may be helpful to include a product demonstration, if applicable. This will encourage dialogue and provide first-hand knowledge to investors as to how your product or service works and how it solves a problem.
Your pitch deck should include only key details. Try to keep your presentation to 10 to 15 slides and 10 to 20 minutes long. Should you need guidance, read Pitch’s guide to delivering a standout pitch.
Step 5: Identify Your Investors
It is essential to work with investors who share your ideals, and not just the ones who offer you funds. Since there will be a transaction of ownership rights, you want investors who will use their leverage in the best interest of your business.
Do your research into prior business transactions and investments of the investors you’re interested in to ensure they have the corresponding experience in your industry and product.
You should start by compiling a list of investors who you’d be interested in a partnership with and prioritize them accordingly. When considering who to include, look for the following criteria:
- Industry knowledge: Investors with experience in your business’s industry are more likely to consider working with you. Not only will they have valuable insight into the operations of your business, but they can also offer support for future growth. Sometimes, there may be a specific market they target for which they have already raised funds.
- Investment stage: There are various stages into which VC investors may segment themselves. They can partake in the seed stage, early stage, or late stage. This means that they may be involved in different rounds of funding, known as “series.” Series A, B, C & D funding are the various funding rounds that an investor chooses to participate in.
Once you’ve determined who to query, you’ll need to figure out how to get in contact with them. Whether this be through existing business connections, networking events, or even a cold call, you’ll want to introduce yourself and try to set up a preliminary meeting to present your pitch.
You may not gain the interest of all of the investors on your list. However, even if you’re faced with rejection, it’s worth asking if you can instead be put in contact with other suggested venture capitalists.
Step 6: Negotiate Terms & Prepare an Agreement
If you’ve presented your business and there’s interest from investors, the next step is to discuss the potential terms and conditions of an agreement. This will likely be in the form of a term sheet, which is essentially the step that outlines all necessary terms for review before drafting and signing a binding legal agreement. This means preparing for negotiations relating to equity stakes, funding amounts, and other conditions requested by the investor.
Here’s what to look out for on a term sheet:
- Investment amount: There will be a section that references the funding amount the VC firm will invest in your business. Ensure this amount is agreed upon and is accurately reflected as per your discussions.
- Business valuation: There will be references as to the pre-investment value of your business, alongside the value post-investment. See to it that the valuations are calculated accurately and that the post-investment valuation is reasonably attainable.
- Return expectations: There will likely be a timeline and amount placed by the investors as to when they expect to see a return on their investment. Ensure that these requirements are feasible and that you’re confident they can be met.
- Level of control: You’ll be relinquishing control by offering ownership stakes in your business in exchange for funds. These percentages should be laid out clearly, along with terms outlining the involvement of operations within your business (e.g., stock options, board seats, and future financing terms).
- Expenses: There may be an expectation from the investors to be reimbursed for incurred expenses relating to the closing of the deal, such as legal fees and travel expenses. See to it that these expenses are agreed upon beforehand.
Step 7: Practice Due Diligence
Just as a VC investor would research and vet your business, you should practice the same due diligence before signing a binding contract. You want to ensure that your potential business partners are knowledgeable, trustworthy, and have your company’s best interests in mind.
This can take a considerable amount of time for both parties but is worth it to ensure a good fit and long-standing relationship. It’s best practice to be communicatively proactive and organized to help streamline the process.
You should be prepared to answer questions from your investors regarding:
- Company structure, teams, and culture
- Product development and operations
- Marketing strategy
- Customer base
- Legal events and existing contracts
- Current financial status
- Plans for future development
In proceeding through your due diligence, here are some points to consider for your investors:
- Experience in the industry
- Reputation with other startups
- Return on investment (ROI) expectations
- Involvement of growth in the business
- Alignment of company goals
- Individuals who will oversee the VC firm’s ownership stake
This step provides the opportunity for both parties to address any questions or concerns before closing the deal. It’s important to be transparent at all times throughout the process to maintain a good relationship with your investors from the start.
For quick access to documents, consider using a file-sharing service to maintain organization between both parties.
Step 8: Close the Deal
The final step is to sign the agreement and close the deal. Similar to getting a small business loan, this will involve the preparation of legal documents—usually by a legal professional—and the review and signature of both parties, which is followed by your business receiving the investment funds.
Here are some common closing documents that may be necessary:
- Investment agreement specifies the investment amount, duration, and applicable payment terms.
- Shareholder agreement outlines the number of shares, conditions of the sale and transfer of shares, and responsibilities of shareholders.
- Employment agreement defines elements of terms of employment, such as compensation, noncompete contracts, confidentiality, and role obligations.
- Voting agreement outlines the right of shareholders to vote for VCs to be elected to the board of directors, alongside the option of first refusal to buy or sell shares.
- Indemnification agreement protects the board and investors in the instance that a third party was to take legal action against the company.
- Certificate of incorporation details the legal structure within a corporation.
- Legal opinion can be provided by an attorney speaking to the company’s legal formation and eligibility to operate.
Necessary documents will vary with each deal, but it’s best to be aptly prepared to ensure a smooth and quick transaction for both parties.
Pros & Cons of Raising Venture Capital for Your Business
| PROS | CONS |
|---|---|
| Is inclusive of businesses of all sizes and industries | Comes with a lot of competition in terms of finding applicable investors |
| Is available to high-potential startups or small businesses with limited resources | Relinquishes your ownership control to account for equity stakes |
| Allows investors to provide support and business advice from first-hand experience | May involve an expectation of rapid growth to provide quick ROI |
Alternatives to Venture Capital Funding
- Angel investors: Angel investors provide seed money to high-potential startups in exchange for equity stakes in your business. See our guide on how to raise angel funding for your business for more information.
- Rollover for business startups (ROBS): A ROBS lets you use funds from your personal retirement account with an investment of $50,000 or more.
- Small Business Administration (SBA) loan: SBA loans are tailored for small and startup businesses with strong credit history. They are partly backed by the government and offer lower interest rates and favorable terms.
- Small business line of credit: A business line of credit is a revolving credit facility that allows for quick and flexible access to funds with limited restrictions. The line is paid down over time and can be used on a recurring basis.
- Small business credit cards: Similar to a line of credit, a business credit card can be used to make immediate purchases and be paid off over time. For our recommendations, see our roundup of the best small business credit cards.
Frequently Asked Questions (FAQs)
It varies depending on the investor and how long they prepare their due diligence. Generally, you can expect anywhere from six months to one year.
Generally, there are three: Seed stage (initial investments from donors or investors), early stage (first few funding rounds to grow the business), and late stage (the business is maturing and expanding).
Angel investors typically provide funds from their personal capital while venture capitalists provide funds through a VC firm (which invests other people’s money). There also may be varying levels of control over your business, as an angel investor will likely have more relaxed involvement and a lower equity stake than a VC.
Bottom Line
Now that you know how to raise venture capital, you can determine if it’s a good fit for your business needs. Sourcing VC funds for your business can be a tedious process; however, it can be an ideal option if you have limited resources to further grow your business. In the endeavor of finding investors, preparation and potential are key elements necessary to build relationships and gain access to capital. Finding an investor who supports your business goals and ideals is essential for success and business growth.
