Venture capitalists are business support entities that provide substantial financial investments to startups in exchange for returns when the business begins to boom. Unlike angel investors who would typically write your business a check within the range of ten thousand to a hundred thousand dollars, venture capitalists could potentially support your business from your seed round to even later stages. Sometimes, this could potentially run into the millions of dollars, depending on the scale of your business and how much they expect in return.

Some of the most successful companies of our modern era have at one time or the other been funded by venture capitalists: think Apple, Facebook, Twitter, Google etc.  As a major source of funding for businesses, venture capitalism has come a long way. On that journey, the system has seen and undergone a number of significant changes before the current system in place. And what’s more, things will continue to change in years to come.

Due to the amount of investment venture capitalists could potentially pump into your business, the process of getting funding from these entities can be quite tedious to put it mildly. This is not to say that getting funding from venture capitalists is impossible, no. But, first of all, there are significant things you need to know when trying to obtain venture capital.

Things to Know When Trying to get Venture Capital

  • Business must be backable: The truth is, getting venture capital isn’t just about having an amazing business idea, as important as having an amazing business idea is. While your amazing idea could definitely be worth some kind of investment for sure, you need to understand that venture capital is a different kettle of fish entirely.  They invest millions and usually expect more than double the amount in return, thus your market size is of great value and importance to them. If your market size won’t yield sizable returns, you don’t have to drop your business idea; you just have to explore other funding options.

 

  • Understand the concept of how venture capitalists operate: As stated above, venture capitalists have a way of handling the funding process that makes them quite different from other funding options.  There are two models VCs are likely to adopt:  general partners, and limited partners.  General partners get involved in managing the money, while limited partners merely contribute capital and are generally passive investors. In turn, general partners make money through what is called management fees and carry. Management fees are usually calculated as 2% of the fund size, while carry is usually 20% of the returns. As carry is distributed only after the capital has been returned to limited partners, venture capitalists don’t make any money on their investment until their investment is paid back.

 

Securing Venture Capital Funding

 

Once you understand how the system works, the next step is to find a VC firm that can be approached for funding. Or, you could perhaps do a shortlist of several firms.  There are local, regional and even international VC firms you might want to look into.

Once you have done your research and found suitable VC firms, you should begin to work on your pitch. A typical VC firm receives hundreds of pitches from entrepreneurs who are trying to get funding. Thus, your pitch needs to really stand out to catch the eye. Sometimes, your idea itself can make VC firms reach out to you, like WhatsApp, when Sequoia Capital approached its founders and persuaded them to accept a $60 million investment offer.  That particular investment would later yield $3 billion when Facebook acquired the company for $16 billion.

In the absence of that, just work on your pitch and keep optimizing and applying when you get rejected. Your pitch must show that your startup has a clear growth plan in place to yield returns. Once your pitch is accepted, an agreement plan will be drawn up. The VC plan will do due diligence and complete research about the business. You also need to be careful when dealing with VC firms. Guy Kawasaki, a Silicon Valley guru insists that you should always ask for 25% more than the initial investment offer. 

Good luck!

Farva Jafri

Author Farva Jafri

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