How To Raise Venture Capital: What Would A Successful VC Recommend?
Despite what you might hear about fundraising opportunities and the state of the markets, venture capital funding is still going strong globally. While total global investments in 2022 were down from peaks in 2021, funding figures remained higher than totals from other previous years — a positive for entrepreneurs with growth plans or new startup ideas. The question shouldn't be if you can raise venture capital but rather, how to raise venture capital.
Venture capitalists and angel investors are still writing checks, especially in SaaS and other technology sectors, and knowing how to raise venture capital can help you get a slice of that pie. Check out my guide to venture capital funding below for a step-by-step approach and the top tips to help you win with your next funding round.
PS: if you have a firm grasp on the basics already and just want specific tips for our current market conditions, check out this CFO’s guide to getting cash in stricter markets.
Why Venture Capital Funding?
Venture capital investors can provide startups and other early-stage companies with financial benefits that other funding options don’t. For example, most venture capitalists are pretty well connected within the financing industry, enabling new connections and networking for you and your business — something revenue-based funding models can’t do.
Venture capital funding may also be accessible when options like debt financing aren’t, due to credit situations or a lack of historic business revenue. VC firms don’t always look for a financially healthy business (a trait banks like); instead, experienced venture investors look for promising ideas and the ability to execute.
Fundraising Steps
When you’re ready to raise venture capital, start with the steps below. This approach increases your success in connecting with the right venture capital investors, whether you’re using cold email strategies or warming up potential investors via networks like LinkedIn.
Step 1: Complete Business Valuation
Before you try to connect with venture capital investors, spend some time on your own due diligence. The first step is determining your business valuation, as this figure is typically your starting point when negotiating with venture capitalists.
Depending on where you are in terms of business formation and growth, this step can range from a best estimate to a firmer valuation (based on net assets or revenue multiples). It can range from a well-informed conjecture to a more robust calculation. The goal isn’t always to arrive at a hard-and-fast truth about value but rather, to create a springboard from which you can discuss value confidently with interested investors: don’t walk in with your blue-sky enterprise valuation as a non-negotiable. Of course, you’re going to want the highest possible valuation but how you approach this topic will let investors know how reasonable you are to and whether or not you understand how the game works. Instead, use the numbers to get a better understanding of the lowest valuation you’d accept, then determine your overall acceptable range from there.
Step 2: Understand Your Funding Needs
One of the biggest components in knowing how to raise venture capital is knowing the amount of money you need. Base this figure on factors such as:
- Your chosen business model. Different models command varying levels of initial capital. For example, a freemium model typically requires more upfront working capital than a subscription model that aims to generate immediate revenue. Knowing how long it might be before your business is cash flow positive helps you understand how much investment funding you need.
- What funding round you’re in. Your goals for raising capital should be different in various funding rounds. You may be able to raise more in Series B financing than in Series A financing, for example, because your business is usually more established by that point.
- What your business goals are. Your funding needs should align closely with business goals. Don’t look for $1 million from venture capital funding if you only need $250k to succeed.
- Your current business valuation. While valuation won’t 100% dictate your access to funding opportunities, it’s a metric that will carry weight with venture capitalists and angel investors alike.
- Your dilution preferences. You’ll likely need to trade ownership in your business for capital injection. If you only want to give up 30% ownership, the amount you can raise from venture capitalists is limited by that preference.
Step 3: Create a Pitch for Potential Investors
Part of the fundraising process is educating potential investors about your business, product, or idea. Before someone can literally buy into your business with seed funding or other capital, they need to buy into it mentally and emotionally. In other words, they must understand the idea and be (at least somewhat) passionate about supporting it.
Seed this passion in others with a wow-worthy pitch deck. Collaborate on this step with your co-founder and other subject-matter experts within your organization. Your goal should be to create an intro to your business or idea that:
- Sparks conversions. If you want private equity money or support from VC firms, you must give those individuals a reason to engage in conversation with you.
- Builds interest. Your pitch deck should build excitement and curiosity so investors want to support your business.
- Creates action. End every pitch with a call to action. Tell potential investors how to find out more or get involved with your project.
Step 4: Research Venture Capital Investors You Can Approach
Cold email processes might turn up some opportunities, but in general when raising capital, the warmer your leads, the better your chances at success.
Start with research into which venture capital firms might be right for your business. Consider factors such as:
- Your industry and sector. Venture capitalists tend to concentrate on certain industries and sectors, in part because they have enough experience or knowledge in that niche to pick potential winners.
- Your target market. Some investors are interested in supporting solutions for specific target markets or audiences. For example, a VC investor with a heart for children might look for opportunities to support educational products.
- Your location. Many VC firms invest solely in businesses in a specific geolocation. Others might want to support companies in emerging markets.
- The investment round. Some venture capital firms specialize in seed rounds while others are more likely to invest in Series A or B rounds.
Step 5: Find Ways to Connect With Venture and Angel Investors
After evaluating the potential investors, look for ways to connect with them organically. When you’re part of the same networking or online communities as venture capital investors, you increase the likelihood that they recognize your name or will give you a few minutes of their time.
When possible, start engaging on LinkedIn and in online or in-person circles before you need venture capital funding. That way, when you’re ready with a term sheet and business idea, you have an audience warmed up for your pitch.
Step 6: Begin to Engage in Funding Rounds
At this point, you’re ready to pull the trigger on funding rounds. Whether you’re seeking pre-seed, seed funding, or Series A funding depends on your financial needs and business stage. Early-stage companies typically start by seeking seed rounds, for example, but if your business is established and you need funding for growth or a new product, you may look to other types of funding.
Step 7: Repeat the Fundraising Processes as Needed
Early-stage fundraising is only the first step for many businesses. As you meet growth milestones, you might engage in Series B funding or even seek an IPO. Repeat all of the steps above to support strong fundraising for every round.
Tips for Raising Venture Capital
While you’re working through the above steps to raise venture capital, keep these tips in mind. These work for entrepreneurs, startups, growing businesses, and established organizations alike.
Create a Stellar Business Plan
Your business plan serves some of the same purposes that a pitch deck does while also offering backup and follow-through on the pitch. Start with an executive summary or intro that has all the engagement wow factor of your pitch.
Once you hook your audience, impress them with a comprehensive business plan that outlines planned milestones for growth and includes detailed marketing, financing, pricing, and operational plans. Ultimately, investors should walk away from your business plan feeling confident in your vision and your plan to enact it.
Start With a Highly Targeted List of Venture Capital Investors
Whether you’re in a seed round or working on later VC funding efforts, ensure you’re targeting the right people. Before you cold email prospects or polish your pitch deck for presentations, spend time on research.
Create a list of potential investors, ranked from most likely to be interested to least likely. You can start at the top of your list to try to land a lead investor, or you can start at the bottom of your list, approaching a few investors at a time and garnering feedback about your pitch. By the time you reach your most likely investors, you’ll have polished up.
Know Your Competition
It’s not enough to be the expert on your own business. Investors expect you to be able to answer questions about your target market, the business models of your competitors, and how your product will fit into the overall market.
While good fundraising tactics usually involve starting with investors who are familiar with your niche, you should still expect to act as the educator. Do the homework so you present as a competent teacher to inspire confidence in investors.
PS: don’t be overconfident here and say that competitors aren’t a problem. Admit their benefits and advantages, otherwise, you’ll look untrustworthy to potential investors.
Put Effort Into Your Demo
When seeking venture capitalist or angel investor interest in a SaaS or other technical product. you need a strong demo. A pitch deck with screenshots and visuals might pique someone’s interest, but a working demo helps them truly understand your value proposition and how your product might serve the target market.
The more complex your product is, the more extensive and polished your demo needs to be.
Always Start Negotiations With a Term Sheet
A term sheet is a short document, usually presented in bullet-point format, that you can share with potential investors. Whether you’re filling seed rounds or seeking Series B funding, this document outlines your preferences and what you need from investors.
Term sheets tend to be a launching point for negotiations, but you can also use them to build structure and boundaries. For example, you can include some hard limits so investors can self-select out of the conversation, ensuring you don’t waste their time or yours.
Be Prepared to Hit Planned Milestones
When you can demonstrate a proven track record to potential investors, they’re more apt to decide in your favor. Enter into fundraising with a strong plan to hit all the milestones you plan and an idea of what metrics will indicate success. For example, if you entice investors with your potential growth rate, define how you’ll track that rate (& how often you’ll report it) so everyone can agree on performance and when success is reached.
Build Relationships
While all your fundraising efforts should be professional in nature, you don’t have to keep humanity out of venture capital funding. Look for ways to build relationships while raising capital. Investors that already have a personal connection with you are more likely to consider your idea. Long-standing relationships can also support via mentorship roles, making it easier for investors to offer you actionable advice as your business grows.
Hire the Right People
Often, investors put their money behind a founder or co-founder who is truly compelling. But even as a startup, who you hire can matter for fundraising purposes — and it certainly plays a role in later Series B rounds or IPO opportunities.
When you hire the right people, your organization is strong across the board. Your team can help you speak confidently to investors about products and then back up your claims by following through on development and growth.
Explore Funding Beyond Large VC Firms
Keep all your fundraising doors open. I’m not saying friends and family should foot the bill for your business, but rather, that starting with your existing network and circle leads to fast fundraising for bootstrapping purposes.
Perhaps you’d like to try your luck at debt funding or have existing revenue that you want to seek financing against.
You should also keep in mind options like angel investors, who are often able to enter into funding rounds based on perceived potential and mission-aligned values, when VC firms may look more at specific metrics.
Start Venture Capital Funding Journey Today
Fundraising isn’t easy, but when you have a reasonable idea of how to raise venture capital by following the steps and tips above, you can increase your chances of success in all funding rounds.
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