Today’s rapidly evolving landscape allows entrepreneurs to disrupt entire industries. The only challenge preventing them from turning ideas into reality: securing the necessary funding.
That’s where venture capital (VC) comes in handy. However, raising venture funding is easier said than done. It requires a well-orchestrated dance between founders and investors, where you need innovative solutions, strategic planning, and persuasive storytelling to seal the deal.
In 2023, startup dealmaking is at an all-time low, with the slowest quarter observed in over a decade. It’s increasingly difficult for early-stage startups to receive venture capital, but that doesn’t mean it’s impossible—it just means you’ll need to be more strategic and targeted.
It also means you might need to rely on debt financing for a time.
Fortunately, you don’t have to reinvent the wheel to secure the venture capital funding your startup needs.
Below, we’ll help you understand how to raise venture capital for your business (the right way) without wasting valuable time, money, resources, or equity.
How to raise venture capital
Regardless of how you approach venture capital fundraising, you’ll hear “no” more than “yes.”
That’s all part of the game.
Remember, you only need a handful of venture capital investors.
While there’s no one-size-fits-all strategy for raising venture capital, there are tried-and-true best practices you can follow to boost your odds. Here are a few of those techniques:
1. Evaluate your financing needs
First, take a look at your financial situation. Do you need an influx of capital right now? What about in 12 months? How do you plan to spend the venture capital?
Sometimes, you can hold off on securing venture capital funds. Other times, you might not need it at all.
Startup founders obsess over equity financing, but it can often be more expensive (in the long run) than debt financing. A loan gets paid off, but equity will cost you a percentage of your company forever.
2. Determine the right timing
Now isn’t always the best time to secure venture capital for your startup.
Everything from your recent financial documents to market conditions and your trajectory can influence venture investors (for better or worse).
While there’s rarely a perfect time to pursue equity financing, here are a few factors to consider:
- Market conditions: Timing your fundraising during favorable market conditions, venture capital industry growth or investor enthusiasm can work in your favor. It’s important to know broader economic factors, industry cycles, and relevant regulatory changes that could impact investor appetite.
- Financial needs: Evaluate your startup’s financial runway and business funding requirements. Determine how much capital you need to achieve your next milestones, and start the fundraising process before you run out of cash.
- Investor readiness: Take an honest look at your startup’s readiness for venture capital investment. Are your operations, infrastructure, and team prepared to scale? Do you have robust financial and reporting systems in place? Investors will scrutinize these aspects during the due diligence process. Ensure your startup is ready to handle the additional scrutiny and expectations that come with venture capital.
- Milestone achievements: Strike while the iron’s hot after you hit an impressive milestone. Milestones include hitting key product development targets, reaching substantial revenue or user growth, securing strategic partnerships, or demonstrating traction in your target market.
Ultimately, the right timing for raising money is a strategic decision that balances various internal and external factors.
“It is possible to raise money too soon,” says Simon Taylor, CEO and founder of HYCU. “Acting too soon can lead to inflated investor expectations that you are unable to fulfill.”
It’s essential to balance seizing opportunities and ensuring your startup is well-positioned to attract and make the most of venture capital investment.
3. Refine your minimum viable product
You don’t need a completely built-out product or solution to win investors’ hearts, but you do need a minimum viable product (MVP). Better yet, we recommend a minimum lovable product (MLP).
Investors should be able to test and use your product, witnessing its value first-hand. Test your MLP with customers and gather feedback on their experiences.
A venture capital firm wants to invest in projects with product-market fit and high-growth potential—showing a tested idea (with a scalable business plan) is a surefire way to win their investment.
4. Build your pitch deck (and demo)
A startup pitch deck is crucial for capturing the attention and interest of potential investors by succinctly presenting your company’s vision, strategy, and market opportunity. It’s a visual story that communicates your startup’s value proposition, demonstrating its potential for success and the team’s ability to execute that potential.
Without a compelling pitch deck, you risk losing the opportunity to make a strong first impression, limiting your chances of securing the essential funding needed to scale your venture.
Before you start building your startup pitch deck, look at examples from some of the most successful business pitches:
5. Prepare for due diligence
Investors will want to look into every nook and cranny of your business. They want data to back up your claims, and they’ll need to see legit metrics before they put down any money. Here are some ways to prepare your company for intense scrutiny:
- Documentation: Gather all your documents and financial records and organize them for quick and easy reference.
- Financials: Double-check your financial sheets and ensure everything is accurate and up-to-date.
- Intellectual property (IP): Provide evidence of IP registrations and all your efforts to protect your IP.
- Data security: Address data security measures, compliance with privacy regulations, and how you protect user data.
- Risks: Be upfront and acknowledge your weaknesses and risks. If you don’t, investors will—and it’s better for you to show you recognize threats and have a plan to overcome them.
- Questions: Investors will ask questions. Know your metrics and be ready to answer on the spot. They’ll ask about your business model, revenue projections, market strategy, and more.
“Investors want to invest in companies that are transparent and honest,” says Antony Chauvet, an early-stage investor. “By being transparent, you can build trust with investors and increase the likelihood of a successful funding round.”
6. Spread the word
It’s not about what you know; it’s about who you know—and that’s never been more true than with venture capital fundraising. Start with your network and connections and spread the word that you’re looking for investors.
You might find someone in your immediate connections interested in investing, or they might know someone who knows someone.
Start this process early and build relationships with investors, venture capitalists, and VC firms before you need the cash. Looking for networking opportunities when you’re about to run out of capital feels desperate and ingenuine.
Build relationships from the get-go and nurture them so they’re primed when the right time comes.
7. Choose the right investors
While your startup might desperately need venture funding, you can’t afford to choose an investor that doesn’t align with your business’s mission or vision.
Securing venture capital is a two-way street—they need to like you, and you need to like them.
Here’s how to make sure that happens:
- Define your goals: Clearly outline your startup’s vision, goals, and values. This clarity will serve as a compass to identify investors who align with your mission and can provide strategic guidance.
- Consider the expertise: Some investors specialize in early-stage ventures, while others focus on growth-stage or late-stage investments. Matching the stage of your startup with the investors’ preferences will ensure that you target the right individuals or firms.
- Research your options: Evaluate potential investors’ track records, portfolio companies, and investment strategies. Find investors who bring more than just capital to the table. Think about mentorship, industry connections, and guidance.
- Evaluate financial terms: Assess the valuation, equity stake, board representation, and any restrictive clauses associated with the investment. While financial terms are essential, finding a balance between alignment and fair treatment for all stakeholders is crucial.
8. Do your investor due diligence
Investors will scrutinize every aspect of your business before investing, and you should do the same due diligence on your investors before giving away equity.
Here are a few things you’ll want to consider:
- Investment strategy: Does the investor tend to try and exit early, or do they stick with startups for the long haul?
- Portfolio companies: Does the investor have experience working with similar companies? Have they been successful?
- Industry focus: Will the investor have connections and experience with your industry?
- Reputation: How does the startup ecosystem view your investor?
- References: What do other entrepreneurs and founders have to say about working with a specific investor? Ask for references to learn about their experiences.
“Find that market-clearing price and then pick the investor at that price you want to work with,” says Henry Ward, Founder and CEO of Carta. Henry suggests negotiating with investors you want to work with, especially if they have a lower valuation of your company.
Don’t be afraid to ask them to match the terms of other investors interested in your business.
9. Understand the term sheet
A term sheet outlines the terms and conditions of a potential investment opportunity. It’s a preliminary agreement that typically includes the following:
- Valuation: The money valuation of your startup.
- Investment: The amount of money the investor will offer.
- Equity stake: The percentage of company ownership the investor will take.
- Investment type: The form of investment, whether equity (stock) or convertible debt.
- Liquidation preference: The order in which investors and founders receive proceeds after a liquidation or exit.
- Board representation: The number of board seats the investor will receive.
- Voting rights: The investor’s voting rights and which decisions will require investor approval.
- Anti-dilution provisions: How the investor’s equity will be protected during future fundraising rounds.
- Dividends: If your investor will be entitled to receive dividends before other shareholders.
- Vesting schedule: The vesting schedule and terms for the founders’ equity.
- Use of proceeds: The guidance for how investment funds will be used (product development, marketing, expansion, acquisition, etc.).
There are a lot of tricky terms and nuances to this negotiation process, so it’s best to work with a lawyer who can prevent your company from getting hurt by bad deals.
“A good lawyer will help you set up the company properly so it’s prepared to take investment now and in the future,” says Mark Mullen, co-founder of Bonfire Ventures. “Then, you and the VC negotiate the deal [i.e. get a term sheet]…A good lawyer should also be able to guide you through the documentation phase after a term sheet is signed.”
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