In this article, we will give you insights and tips on how to obtain funding by a VC. The article will start out explaining the importance of funding for your start-up. Followed by the most important steps of getting funded.
Obtain Funding – The Importance
It is well-known that funding will result in a better outcome provided that the fund is used usefully. This does not only apply for start-ups receiving funds, actually, it applies to every type of funding. For example, when a country starts investing more and more into education the level of education is going to go up in this country. But what are the most important functions to obtain funding?
First of all, we would like to mention scalability. Start-ups may have brilliant business plans and are ready to become giants in their market. However, the amount of capital they have access to may limit there scalability. In order for a company to successfully scale their operation, they need to adjust almost all the aspects of the operations. They have to ensure that they can keep up with demand. What this means in practice is that a company needs to invest a lot of capital into production. As mentioned this costs a lot of capital what start-ups usually do not have. That is why a VC is especially important in scalability. When they obtain funding they can start increasing there production.
Beside a VC supplying a start-up with a fund of capital, they offer a lot of guidance. VC’s have a lot of experience in guiding start-ups. Due to there experience, they know what start-ups have to deal with. Founders. may not have the experience of running a business and do not always know what to look out for. Here a VC comes in handy as they can supply they start-ups with the needed knowledge in order to avoid big mistakes. So it is not only how to obtain funding but also how to obtain guidance.
Improving Your Network
A VC normally has quite a large portfolio of start-ups. With this portfolio comes a large network of entrepreneurs. When closing a deal with a VC they may suggest you to work together on a project of one of there start-ups. This could be a great business opportunity for your start-up. Furthermore, VC tend to have an expert in some fields of business. These experts may help you get in touch with some of the big players in your market. For example, if you are a startup which makes potato chips an expert in the F&B business could help you strike a deal with a large customer, like a grocery chain. But experts could also help you with problems within the company. A VC may have a law expert which could help you avoid getting into trouble with authorities due to unforeseen mistakes.
How To Obtain Funding
For the purpose of this article, we have decided to include the top six most important steps on how to get funded by a VC. In practice, there are a lot more steps but the six we will mention are the once every start-up should use in order to get funding.
Step 1: Understand What VC Means
Before you can start to think to obtain funding you should do research on what this means. VC will have an impact on your company. Is this the impact you want for your company? Most likely it is, however, keep in mind things will change once you get funded by a VC. For some founders there business is a part-time job. Are you ready to give up your “normal” job and go full time into your own business?
Step 2: Is Your Startup Ready For VC
To obtain funding your startup needs to be ready for a VC. Some VC’s will invest in idea stage companies however this is rare as this is very risky for a VC. So if you are applying to a VC that is investing in later-stage companies, make sure you have a concrete business. The most important factors of a concrete business are; A good founding team, minimal viable product and customers. The team is considered the most important factor for many VC’s. This is because a VC has to trust the team before they are willing to invest.
Step 3: Make A Pitch Deck & Presentation
If you apply to a VC usually you are asked to hand in a pitch deck. This is a short PowerPoint presentation which summarizes your company. The pitch deck should consist of the following slides:
- Problem statement – What problem is your company solving?
- Solution – What is the solution to the problem described?
- Product/Service – Shortly describe what the product or service is which you are providing.
- Target market – What is your potential market? It is useful to always provide the VC with an estimate in the currency of the country in which the VC is operating.
- Competitive advantage – How do you compare to your direct competitors? Are you cheaper? Easier to use? Think of your competitive advantage.
- Business model – How are you making money? What are your margins?
- Traction – What is your traction so far? It could be that you have customers but not paying customers yet. Explain this.
- Team – Who are the founder? Maybe the team is already bigger than the founding team. Explain the background of all the team members. This includes educational and professional background. In addition, you could add the relationship the team members have. Are you friends, family members?
- Funding requirement – What is the amount of funding you are seeking? What amount of equity are you willing to give up for the funding? (company valuation) Furthermore, add what you will do with the funding.
The presentation should be similar to the pitch deck, in many cases, even the same PowerPoint presentation is used. Usually, a VC does not give you the opportunity to give a time-consuming presentation. Make sure it is not longer than five minutes.
Step 4: Find The Right VC For Your Startup
Do some research about the VC’s that are operating in your market. The market, in this case, is suggesting the geographic market and the sector. The VC should not be located too far from your location as you want to be able to communicate effectively with them. Furthermore, some VC’s are experienced in specific sectors, you want to find a VC that is specialized in your sector. You could find this out by looking at the portfolio of the VC.
Step 5: VC Term Sheet
This is the first agreement that the founders are shown by the VC. This Term Sheet is normally composed of three different sections. These sections are:
- The Funding section – This shows in writing what amount of funding the VC is providing in exchange for equity.
- Corporate governance – In this section, the distribution of decision making power is explained.
- Liquidation and exit section – Here the directions in the case of liquidation or exit are described.
Step 6: Close The Deal & Due Diligence
Before closing the deal it is important to inform everyone within the company including investors what will happen. Make sure every stakeholder is aware and content with the upcoming deal. The last step before closing the deal is to inform with a legal advisor. They have the experience and can tell you if anything is missing.