Introduction
Raising venture capital is progressively becoming more difficult with venture capitalists becoming more selective about their investments. Typical vc firms pick only one or two startups out of a thousand, and potential ventures are rejected for a myriad of reasons. This in turn makes the process of raising venture capital really challenging. To increase the success rate of getting venture capital, read through these business guidelines suggsted by Judah Karkowsky, that we’ve included in this article.
- Goal-setting
Setting your goal is the first and most important aspect of your startup — are you aiming for stability? Or do you aim to be a risk-taker and become the leader of the world? During this stage, it is good to settle if your company will be headed by one or more decision-makers.
The primary goal of Venture Capital firms is to invest in companies with high potential to yield high returns. So if your intention is to become a small, humble family-owned business, pursuing the venture capital route may not be the best option for you. But if you wish to transform a startup into an empire, then this is for you.
- Setting up as a C corporation
Once you are ready to start raising funds, it is time to officially establish your business. We encourage startups to consider a C corporation, as they are an investor’s preferred type of corporation because of its lack of limitations on the quantity and type of investors. Additionally, C corporations are also beneficial because they are unrestrictive, giving investors greater flexibility. S corporations are a common alternative too, because of their tax benefits for smaller-scale companies. But upon comparison with C and S corporation, C corporation’s lack of restriction precedes the other.
Another consideration will be to start a company in states that provide an optimal environment for businesses. Some states have better laws and tax regulations that allow companies to prosper.
- Patenting Intellectual Properties
This is especially for businesses that are conceptualized around new technology. We strongly emphasize business owners file a patent for their product or idea before they showcase it to investors. If unsure, approach a patent attorney who will assist you in determining if your concept is other existing patented ideas or if they are not considered unique enough to be qualified for patent protection.
All business owners should be warned that ideas that are shared before being patented can limit or even eliminate the chances of obtaining patent protection. To be extra cautious, one should also ensure that the rights to the new concept belong only to decision-makers.
- Raising funds at early stages
Most startups raise funds in the following stages:
- Seed funds: Refers to the early-stage investment enough to get the business started
- Series A: These are investments that help transform your startup into a more efficiently-operated company. The funds are in the ranges of high thousands to low millions.
- Series B & Series C: As your business matures, this stage helps to boost further growth and optimize the business. The investments in these rounds are usually ten to a hundred million.
Since venture capitalists invest millions at a go, startups still in the seed fund and series A-stages are too early to jump on this bandwagon. Instead, try looking for other methods to raise funds such as angel investors or crowdfunding!
- Understand venture capital firm’s business model
Venture capital firms operate in the same way as the mutual funds that lie in a retirement account. First, the firm pools investor’s funds and invests the total sum into prospective startups.
Next, the fund managers will profit by consuming the management fee (which is equivalent to 2% of the total invested fund) and carrying a set portion of the returns. Most fund managers carry about 20% of the return, but they do not receive it until the investors have their initial investment amount back.
- Consider if your business is in the right stage
Generally, most companies receive their funding in their fourth year of establishment. Whereas, it is close to impossible to receive investment after the company’s eighth year.
This is because venture capitalist firms look at these two aspects: the potential to grow and risk. If your company is too young, though there may be a high growth potential, it also signifies the high risk that it may fail. Meanwhile, older companies are assumed to have exhausted their potential to grow. In essence, these firms are looking for the perfect combination of a company that is well-established enough to have a reasonable success rate but is not fully exploited by the industry yet.
- Preparing documents for firms
- Elevator pitch: this should be a brief pitch that catches the investor’s attention. The summary should be easily comprehended by people with no industry knowledge
- Executive summary: it refers to a page-long summary of your company that will be used when there are no physical pitches. The summary should combine key elements of your pitch with an overview of important technical details of your idea.
- Business plan: it should contain a detailed outline of how you intend to grow the business, the company’s current financial status, a breakdown of how the investment will be utilized, and how investors will get their return.
- Presentation: this slideshow should present the highlights of the business plan in a story format alongside visuals like charts and images of your product. This is a great way to appeal to investors.
- Selecting the right target
Every venture capitalist firm has different focuses. It is crucial for business owners to understand their company’s market position to refine their target firms. Once you figure out the firms that may be compatible with yours, remember to send an email to express your interest.
Conclusion
Starting a business is tough, and getting venture funds is even harder considering the massive competition. But by following these eight steps, we believe it will elevate your company’s position in the market while increasing the probabilities of getting successful funding too. With that, we wish you the best of luck with your business venture!
