What is venture capital?
Venture capital is financing that’s invested in start-ups and small businesses that are usually high risk, but also have the potential for exponential growth.
The goal of a venture capital investment is a very high return for the venture capital firm, usually in the form of an acquisition of the start-up or an IPO.
Why would you want to use venture capital?
Venture capital is a great option for start-ups that are looking to scale big — and quickly. Because the investments are fairly large, your start-up has to be prepared to take that money and grow.
Advantages of working with venture capitalist firms
The biggest advantage of working with venture capital firms is that if your start-up goes under — as most do — you’re not on the hook for the money because unlike a loan, there’s no obligation to pay it back.
Venture capitalists come to the table with a lot of business and institutional knowledge. They’re also well-connected with other businesses that could help you and your start-ups, professionals that you might want to take on as employees, and — obviously — other investors.
Disadvantages of working with venture capitalist firms
While you don’t technically have to “pay back” venture capital, venture capital firms are expecting a return on their investment.
That means that a start-up that accepts VC money needs to be planning for an exit of some kind, usually an acquisition or an IPO. If that’s not your goal — or if you see yourself running your start-up forever — then venture capital is not for you.
On that note, part of what venture capitalists want in return for their investment is equity in a start-up. That means that you give up part of their ownership when you bring on venture capital.
Depending on the deal, a VC may even end up with a majority share — more than 50 percent ownerships — of a start-up. If that happens, you essentially lose management control of your company.
General things to consider when you’re looking for a venture capital firm
VCs will expect entrepreneurs to be very buttoned up. They’re writing big checks to a small number of companies, so they have the luxury of only investing in the well-prepared businesses.
The first step to finding venture capital is to make a smart introduction to the venture capital firm you’re interested in meeting. Venture capitalists rely heavily on trusted connections to vet deals.
While some VCs will take pitches from an unsolicited source, it’s best bet to find an introduction through a credible reference.
You also shouldn’t try to contact as many people as possible. Instead, try to find venture capital firms that are the best possible fit for your start-up and your deal.
The more closely aligned your start-up and you, as founder, are with the needs of the venture firm, the more likely you’ll find venture capital firms willing to write you a check.
Every pitch to a venture capital firm starts with an introduction to someone at the firm. It helps to know the exact profile of a venture capitalist to know which level of introduction makes sense.
Typically it’s starts with an introduction to an associate and then you can work their way up to the full partnership.
But if you can’t find any connections? Your next best alternative is to make the warmest possible introduction.
You’re looking for any connection you can make to the venture capitalist so that you can demonstrate you’ve done your homework and you’re not just sending out form letters.
Look for any background you can find on what previous deals they may have done that relate to your pitch. Look for some recent press that they may have gotten that you can refer to.
You just need to create a little bit of warmth and personality to what is otherwise a cold intro. Showing that you’ve already done some of the homework will go a long way toward making sure you don’t wind up in the “deleted” folder.
And getting a commitment from a private investor relies on the strength of a founder’s pitch. But the pitch process starts long before a founder finds themselves standing in front of the investor with a pitch deck.
Luckily, most VC firms have a documented process founders should follow in order to guide their approach.
