VC Process: Everything You Need to Know
The VC process should be part of the business startup plan from day one to secure funding from venture capital sources.3 min read
The VC process should be part of the business startup plan from day one to secure funding from venture capital sources. Venture capital funding is a good way for a new company to get a head start toward the next level of their business plan.
About How Venture Capital Works
Venture capital funding is on the rise in many areas, such as technology. The purpose of venture capital firms investing in private companies, in simple terms, has two objectives: equity or part ownership of the business.
There are several characteristics of a VC firm that make it stand out from other types of investors. Generally, the goal of a venture capital firm is to help a business expand rapidly. The expansion increases the odds of a positive financial return by selling the company using mergers or acquisitions or through an initial public offering.
About Venture Capital Investing
Venture capital firms only provide funding to a business if it is a compelling opportunity. This is determined by:
- Scrutinizing and analyzing the strength of the management team.
- The size and interest of the market.
- If the company has a tech advantage.
- The company's financial health.
- The reason(s) customers prefer the company over competitors.
Funding by venture capital firms usually specializes in specific stages throughout the life of a business. This may be the expansion stage, the initial seed stage, or the later stages. Other firms, however, invest regardless of which stage a company is in. Some firms invest only in business-to-business or business-to-consumer while other firms invest in both.
Venture capital firms may invest funds they've raised through the years from individuals, pension funds, and endowments and invest them on behalf of others. In many instances, representatives of a venture capital firm will become a member of the board of the company they've invested in. This allows the investor to advise, support, and monitor the companies they've backed. It also enables the venture capital firm to have a voice in strategic planning to include support services, such as marketing, sales development, and employee recruitment.
Benefits of Using Venture Capital Firms
For a new company starting out, funding is necessary to drive the growth of the business. The funding that the company starts with is usually earmarked for marketing, sales, and initiatives. Instead of using initial revenue or worrying about generating revenue, a venture capital firm is an option. This helps the business:
- Manage current and future operating expenses.
- Operate at a loss while working to strengthen and expand the business.
- Hire key employees.
- Start to build long-term operations that are sustainable and profitable.
- Create a platform to become profitable, go public, or be acquired by another company.
Venture Capital Firms and Money Making
Venture capital firms make money in two ways. The first is with a management fee. This may range from 2 percent to 2.5 percent of the capital funded. The second is with carried interest. When the firm ultimately exits the investment, it must repay the venture capital investors. Once this is completed, any profits made from the exit are divvied up between the venture capital managing team and the company's limited partners 80:20.
A venture capital firm is usually looking for three to five times the investment made in a company. Returns may be higher or even completely off the mark.
Obtaining Venture Capital Funding
There are several things to know about obtaining venture capital funding that can make the process a little easier. Keep these points in mind.
- The firm usually focuses on specific criteria, such as certain industries.
- The stage of development the company is in.
- The location of the business.
Prior to initiating contact with a venture capital firm, find out what criteria they use to approve funding. Next, do not depend on an email to introduce yourself and your business. Venture capital firms receive many unsolicited emails. Most are ignored. The best approach is through an introduction by a colleague, lawyer, or another entrepreneur.
Once a meeting is scheduled, focus on the following.
- A strong pitch.
- Keeping the presentation simple.
- Emphasizing metrics or market demand.
- Telling the product's story.
- Discussing value and profitability.
- Discussing your team.
- Providing a brief conclusion.
If you need help with the VC process, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.