Venture capital is probably the most well-known form of equity investment. Unfortunately, it’s also one of the toughest to land. Television shows like “Shark Tank” and “Dragons’ Den” have popularized the VC pitch process, but pitching and onboarding venture capitalists is often a long, tedious and sometimes expensive undertaking.
If you think your business has what it takes to land venture capital, use these tips to guide the process.
What Is Venture Capital?
Venture capital is often a pool of funds managed by a firm or corporation, but it can also be capital from very wealthy individuals. VCs infuse large amounts of capital (i.e. upwards of tens of millions of dollars) into young businesses. In exchange for their large investments, they’ll often demand large ownership stakes.
When Should I Reach Out to Venture Capitalists?
Venture capital funds invest in businesses with high potential returns. Generally, VCs make investments into companies that are past the minimum viable product stage, have figured out who they are and now just need to scale. Unlike angel investments, market traction is a requirement when seeking VC funding.
VCs can invest multiple times into your business during multiple rounds of the fundraising process. They typically invest during early-stage Series A and B rounds, but they can also get onboard during later Series C and D rounds.
How Should I Reach Out to Them?
There’s a limited number of venture capital funds around the world (less than 200), and there’s even a lesser amount of quality funds with great track records.
The greatest aggregate of VCs, however, can be found in Menlo Park, Calif., on Sand Hill Road. Another great resource is the National Venture Capital Association (NVCA), which lists most U.S. VC funds and makes for a good starting point to understand who’s out there and what’s available.
How Do I Pitch to Venture Capitalists?
Venture capitalists are looking for companies on the verge of a large growth phase. They’re not interested in helping companies turn an idea into a business; they’re interested in turning a business into a billion-dollar giant. Therefore, VCs are most interested in hearing about revenue and/or user growth. You have to be able to demonstrate that your users, revenue or both are growing and will continue to grow at a rate that requires a large investment to maintain.
When it comes to approaching VCs, it’s very much a relationship game. It’s rare to receive a check from an investor without having a relationship already in place or at least a mutual connection among your networks. To gain access into the VC network, attend VC events and connect with people associated with the VC industry. If you have a great product and you hustle hard enough, you’ll be able to build the necessary relationships.
How Do I Manage the Relationship After They Invest?
Any VC that invests in your company will likely take one or two seats on your board of directors. Because of this, it’s absolutely vital that you choose your VC partners wisely.
VCs can be very hands-on. So you need to keep your board involved with regular updates and allow them to guide you in areas where you’re inexperienced. You’ll want to choose a VC that has successfully helped scale a business similar to yours; this can help you avoid mistakes made during their previous investments.
As always, transparent and honest communication is the best way to work with your venture investors. They can’t help you if they don’t know what’s going on.
What About Potential Pitfalls?
As you grow your business, you’ll come to a stage where you need to raise large amounts of capital in order to maintain your current rate of growth. This means you’ll potentially have to give up a large piece of ownership to a VC fund made up of a bunch of very smart, savvy investors that are motivated to deliver massive returns to their investors.
The main pitfall of VCs is the potential loss of ownership. If things aren’t going as planned, and your investor controls a majority interest in your business, they may decide to remove you from your own company and bring in a replacement. This actually happens relatively frequently and is sometimes the best decision for the company, but it’s important to be aware of this before you give away board seats and ownership to a VC.
The only way to prevent a negative outcome is to communicate regularly with your venture investors and make decisions together that are best for the business.
If you’re ready to make your pitch, see our tutorial on how to create a pitch deck. For more info on the funding process, including how to pitch to angel investors, download our free e-book, The Complete Guide to Equity Financing.
Subscribe to our newsletter