Venture Capital (VC) can be a good source of growth finance for discerning businesses. However, getting venture capitalists to invest in a startup or growing enterprise can also be a major challenge. Earlier, Anand Jayapalan had discussed that venture capital essentially is a form of private equity investment, under which a company receives unsecured funding in exchange for a share of its equity. The goal of venture capital, as a field, is to make investments in early and mid-stage companies and profitability exiting the investment at a later stage, typically within a decade or so.
At the beginning, businesses commonly “bootstrap” their operations. As per this, funds are provided by the founder, as well as their friends and family who are supportive of the business and have confidence that the fledging company shall grow and succeed. However, there would come a point when that fledging company has to scale, at times years ahead of profitability. The startup founders must seek more formal sources to finance their growth at this stage.
There are many sources of funding available to modern startup founders, and diverse types of nontraditional investors are joining an already large mix of traditional VC firms. A large variety of funds tend to target a particular sector or industry, geography or even stage of company development. Numerous connections tend to be made via startup networking groups and mentoring programs. Among the very first things to do would be to develop a pitch deck and target VC firms that appear to be a good fit for the startup and its business model. In case Venture Capitalists are impressed by the business plan and pitch deck, they would conduct their due diligence to verify the reliability of the startup founder and their venture. This would involve a complete analysis of their financial position and performance, products or services, the overall business model and more. If the decision is made to move forward, the venture investor is likely to present a term sheet that will include:
- The venture capital investment amount they are proposing to make
- The equity stake in the company that they expect in return
- Other conditions of the deal
Previously, Anand Jayapalan had mentioned that startup founders may also have to meet certain conditions before the venture capitalists release their funds. This money is likely to be structured to come in several rounds over several years. Most of the VC terms tend to be negotiable. Startup founders should prioritize the terms most important to them and their partners. It is vital to be realistic and specific when negotiating, to avoid coming across as inexperienced or overly confident.
VC investment is ideal for ambitious entrepreneurs leading high-growth businesses, and are willing to trade some control and ownership for the potential of significant future gains. It is not ideal for those seeking an easy path; as VCs expect full commitment and dedication from entrepreneurs in exchange for their investment. It is important that startup founders approach the growth of their company realistically.