Every year, millions of new companies are started in the United States alone. And every one of them has a singular focus: to grow large enough, fast enough, to become a leader in their industry.
As a business owner, you know it takes more than a great idea and a talented team to get your company to the top. Unless you have a large amount of cash on hand to fund your early stage startup, raising venture capital will be essential to growth.
Fortunately, midsize companies with proven growth present an interesting opportunity for venture capitalists and angel investors. On one hand, these businesses are small and agile enough for high growth potential that can deliver impressive returns. But on the flip side, their startup roots can lead to “scrappy” methodologies and processes that could ultimately slow growth.
The way for medium-sized businesses and startups to ensure the slowdown does not happen is to adopt best practices and scalable financial solutions early on that will allow them to accommodate sudden demand. When you have a proven professional and financial ecosystem, you become more attractive to venture capital firms and angel investors.
What is venture capital?
Venture capital is equity financing used by small to medium-sized businesses and startups that anticipate high growth and need investment to sustain that growth. It’s a form of private equity that can be high risk, but also high reward. Venture capital firms may have many portfolio companies across several markets and industries, or they may have just a few concentrated in an area of interest.
Venture capitalists look for companies that have the potential to offer a high return on investment, or ROI, and have a high valuation. In return for investing in a company, venture capitalists gain an equity stake in the company and a place at the table when decisions are made. This usually means a seat on your board of directors.
When a company goes through an initial public offering, or IPO, or is acquired by another company, venture capitalists can exit and gain a return on their investment.
Some companies also accept funding from angel investors. These investors invest their own personal money in a company, instead of investing on behalf of other people or groups.
Types of venture capital
There are many different stages of venture funding available, depending on where your company is in its investment journey. Companies may choose to raise multiple funding rounds, or may decide bootstrapping the company (using its existing resources) is the way to go.
The seed round, or seed capital, is used to support a company’s initial operating costs and is often the first stage of funding that many startups pursue. For example, let’s say you have an idea for a new autonomous helicopter. To build a prototype of the helicopter, and attract additional investment, you need a little money to get your idea off the ground (literally and metaphorically). Seed financing is often provided by angel investors, family, or friends.
Startup capital is the next stage for companies that have a product in hand or a more established service. Once you’ve built your autonomous helicopter, it’s time to start marketing it—possibly by buying online ads, paying for social media influencers to test it, or developing a search engine optimization (SEO) strategy. Startup capital can also help you conduct additional research that can help you fine-tune your company to become something the public (or other companies, in the case of business-to-business, or B2B, organizations) want and need.
Series A financing is the next stage. Once you’ve got your product and business plan, you might need a little more capital to manufacture and produce your product, adequately market and sell it, or do more product development. Companies are usually moving toward becoming profitable at this stage, and the amount invested is usually larger.
Series B round financing is more applicable to midsize companies that are already established. Growth is expected, a product is commercially available, and a company may need a little more capital for things like expanding to new markets. Maybe your autonomous helicopters are selling like hotcakes in England, so you’d like to expand to Asia—that all requires a bit of extra cash.
Finally, Series C funding is considered the final round and is generally reserved for later-stage companies. This investment is most often used for supporting a public offering or making the company more appealing for acquisition.
How venture capitalists evaluate companies for investment
Venture capitalists are interested in businesses that they believe will turn into solid investments. They want to invest in companies that will deliver at least a 10x return over a period of 5 years, or a company that will be bought by another company for a large sum.
After being introduced to a venture capital firm, the company’s founders usually pitch them on their product or service. Once a venture capitalist receives a pitch that piques their interest, it’s time to perform due diligence. They investigate the company’s business model, plan, and current business practices and processes (if they have them). They also look into the founders (perhaps starting with public-facing platforms like LinkedIn and finally doing a background check), financial practices, financial history, and current technology investment (for example, the parts you might be using to build your autonomous helicopter).
For a midsize organization, venture capitalists might also be checking to make sure you have the following financial capabilities in place:
- Fast, streamlined payroll and payroll tax filing integrated with employee data
- Ability to do same-day direct deposits
- Automated employee time tracking
- Reliable and accurate bookkeeping
- Simple payment processing for incoming funds
How to increase your appeal to venture capitalists
Now that you understand a little more about venture capital, what can you do to make your company more appealing in the eyes of venture capitalists?
Here are four things you need to attract attention from venture capital firms.
A clear pitch deck
A pitch deck usually includes information about the problem you’re trying to solve, why there’s nothing on the market today that addresses this problem adequately, and why your company is going to be the one to successfully solve it. It may also provide general information about competitors and the market, which can give investors an idea of how profitable their investment might turn out to be.
A strong, experienced team
Having the right team in place is crucial, especially when you’re small and scrappy. People with deep knowledge of an industry or service are more likely to successfully disrupt it and seem like a more solid investment. If a startup’s founder or CEO has already founded a successful company, or has experience fundraising or in entrepreneurship, they might have an easier time getting funded.
The right financial knowledge and tools
At the end of the day, venture capitalists want to invest in companies that will give them a return. That’s why understanding your cash flow, accounts receivable, and properly pricing your product to appeal to the market is critical.
A solid financial management platform
The best financial foundation is built on software that can grow with you. The technology your company uses should be scalable, offer integrations with other leading applications, and provide business process automation, deep financial and business insight, and finally, always-available technical support.
Companies like Airbnb, Amazon, and Uber all started out small and dependent on venture capital investments. Now Amazon even has its own venture capital funding arm. If fundraising feels like an insurmountable mountain, it may help you to know that you’re not alone and hundreds of other companies have run the gauntlet before you—and ended up successful.
Having a solid financial management platform like QuickBooks in place when venture capitalists come knocking can help you appear like a more sound investment.
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