The process and timing for securing venture capital (VC) funding.

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Shark Tank and similar media often portray the strategy of obtaining external capital as the best way to launch your startup quickly, with the idea being that you should use as little of your own money as possible. However, a more prudent approach is to seek funding as late as possible.

Before pitching to external investors, it’s advisable to utilize your own savings, consider personal loans from friends and family, explore credit cards, or even a home equity loan, among other sources. Venture funding can be not only challenging to secure but also costly in terms of ownership stakes given up. Venture capitalists evaluate a startup’s value in relation to its perceived risk of failure. The further you progress on your own before seeking funding, the less risky your startup appears, making it more attractive to potential investors. Conversely, approaching investors too early may result in giving away a substantial portion of your ownership, potentially diminishing your long-term rewards.

It’s ideal if you can finance the initial $100,000 or more on your own or with the help of co-founders before seeking external investors. Demonstrating that you and your team are personally invested in the venture increases your credibility in the eyes of angel investors or venture capitalists. It’s important to signal that you believe in the venture enough to risk a significant portion of your personal resources.

To determine when it’s the right time to start seeking venture financing, consider the following questions:

  1. Do you have a working prototype if you’re developing a product? Having a tangible demonstration can make pitching to investors much more effective.
  2. If patents are necessary for the defensibility of your business, have you secured them or at least applied for patents with the help of a reputable patent attorney?
  3. Have you finalized your management team, particularly for key positions like CEO, CFO, CTO, and VP of sales? Do these individuals have the qualifications and experience needed for their roles?
  4. If you lack a business background and are a scientist or technologist, are you confident in your ability to serve as CEO, or would you consider appointing an experienced manager to the role?
  5. How much market research, even if it’s informal or non-quantitative, have you conducted? Investors typically require more than gut instinct to believe in your market potential.
  6. When you’re convinced that it’s the right time to seek external investors, follow these steps:

Step One: Researching Who to Pitch

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Don’t approach a vast number of VCs in the hope that one of them will say yes. A more strategic approach is to conduct thorough research on VCs who have funded companies in your industry or have a natural interest in your product. Seek warm introductions through your network to connect with potential investors. Avoid sending impersonalized pitches, as most VCs ignore cold outreach.

Step Two: Writing a Brief Summary Email You don’t need an exhaustive business plan at this stage. Start with a brief email, about 500 to 750 words, that succinctly outlines your idea, its market appeal, and your team’s advantage in delivering it. Request a meeting to delve into more detail.

Step Three: Writing a Pitch Deck and Supporting Proposal Prepare a pitch deck that can be presented in about 30 minutes, allowing time for questions and discussion. Detailed technical and financial information can be included in a leave-behind proposal for VCs to review later. Your pitch should address the five major criteria of a good startup idea: market, competition, technology, proprietary position, and financial requirements. Highlight your management team’s background and accomplishments, and make sure to include achievable goals, milestones, and timelines. These milestones should align with the capital you’re seeking, and it’s essential to maintain a balance between being too conservative and overly optimistic. It’s also wise to tie milestones to specific capital needs while avoiding discussions about equity allocation at this early stage.

Step Four: Delivering a Persuasive Pitch at the Meeting When you’re about to present in front of VCs, keep in mind that you have thirty minutes, which is ample time to make a compelling case. However, avoid overwhelming your pitch with excessive data or technical details. The presentation isn’t the place to delve into every intricate aspect of your technology. Save that for your handout, as VCs will inquire during the due diligence process. Instead of explaining how your product works, focus on who will benefit from it.

Remember that, apart from evaluating the opportunity, VCs are also assessing you as the founder. The key is to convey what you believe is most important in the room. Are you most passionate about the technology, the financials, or the opportunity to serve your customers? Or, perhaps less favorably, do you come across as self-centered or ego-driven?

Due Diligence Will Uncover Exaggerations and Errors Some entrepreneurs receive advice to present their startup in the most favorable light possible. They may even hear that VCs are only interested in markets worth at least $1 billion. This advice can be misleading and counterproductive. VCs don’t blindly trust claims of a $1 billion market; they conduct their research. Any experienced VC can discern if you’re embellishing your potential revenue.

Deceptions or exaggerations are often subtle but typically come to light during the due diligence process that follows a successful pitch meeting. For example, if you claim that your solution is unique, but other companies hold similar patents, VCs will discover the inconsistency through patent attorneys.

VCs invest a substantial amount in due diligence before committing to a deal. Consultants, specialized lawyers, and market researchers don’t come cheap, but the investment is justified because the initial funding can lead to more substantial capital later. Assume that VCs will uncover whether you’re overestimating or underestimating the market and your competitors’ capabilities. Strive for realism rather than false grandiosity or false humility.

You Have the Funding—Now What? Once you secure your first round of financing, it’s time to celebrate, but your relationship with the VC is just beginning. Expect frequent interactions during monthly board meetings and informal calls in between. A good VC partnership should feel like collaboration rather than a performance review.

You can anticipate strategic guidance more than tactical support unless you specifically request it. The focus will be on tracking the milestones defined in your agreement. If, for instance, your goal is to have a working prototype in six months, the VC will check on your progress and offer assistance if needed. However, the onus is on you to outline the tactical steps to reach the next milestone. A good VC won’t micromanage how you use the funds. They won’t inquire about why your travel expenses exceeded the budget or question your hiring decisions for mid-level positions. Their role is to observe, support, and guide from a distance while respecting your responsibility to manage your business.

Source: Fast Company