7 Mandatory First Steps Before Asking for Venture Capital Funding
As the founder of a startup, you are quite likely to be fundamentally aware of the inherent difficulties associated with the process of securing funding for your early stage endeavor. Further complicating the matter is the fact that the way in which venture capital firms evaluate a potential investment has undergone substantial changes in recent years.
So before you begin working to secure a meeting with a venture capital firm, there are several steps you must take, including, of course, determining whether or not venture capital is the ideal source of funding for the particular needs of your startup. Once you have made this determination, you can then move on to the seven mandatory steps that follow, which will help you secure the funding you need to ensure your startup is positioned for long-term success.
Create a Plan for Venture Capital Utilization
Once you have secured the funding requested from a venture capital firm, what precisely do you plan to do with it? You must be able to clearly delineate how you plan to utilize the capital you are requesting while also demonstrating the specific benefits generated by such an influx of funding into your startup.
Without a specific utilization plan in place — whether it is for securing talent or acquiring equipment — you simply cannot expect funding from a venture capital firm. Having such a plan in place will also help clarify whether or not you even need to pursue venture capital funding in the first place.
Confidently Invest Your Own Success
There is no way you can credibly ask for funding from a venture capital firm if you are unwilling to push all of your chips into the center of the table, figuratively speaking of course. When you are requesting someone else to be your backer and to go all-in on your behalf, you have to be so confident that it becomes entirely unnecessary to hedge your bet in any way.
In a literal sense, this means that you can demonstrate to potential investors you firmly believe and are fully invested in your startup’s future. There should be no fallback option, and therefore no scenario in which you begin a sentence with “if this works…”
When you meet with a venture capital firm, the fact that you are wholly invested — financially, personally, and professionally — will make it clear that you are operating from a position in which success is the only option available to you.
Secure Funding From Those Who Know You Best
Venture capital firms will certainly want to work with you if you believe in yourself and your idea so much that you have a significant financial stake in its future success. It is important to also demonstrate, however, that those closest to you believe in your concept enough to gamble on your success with an investment of their own. Securing funding from friends and family will allow you to prove the viability of your business plan to future investors by demonstrating that the people who know you best believe in you and your startup venture.
Establish a Foundation
Venture capital firms are looking for high-upside, low-risk investments, and it is usually the case that a startup in the developmental stage inherently courts too much risk to be worthwhile for either party. Instead, build a foundation of success with the funding you’ve already raised so that you are able to meet with risk-averse investors once your startup is already firmly established yet still offers substantial upside.
Develop an Ideal Financing Structure Based on Accurate Projections and Valuation
It is critical to recognize that a venture capital firm is not merely “backing” your startup; the majority of firms are looking to make an investment in a joint venture, which is often more akin to a partnership. When presenting a potential opportunity to a venture capital firm, it is best to remain open to different financing structures and the potential enhancements a firm might request. These potential structures should offer benefits that appeal to both parties.
Demonstrate Your Company’s Viability
When you work with a venture capital firm, it is critical to take steps that ensure you secure a deal in which you are able to maintain control over your company. You can mitigate the perceived risks associated with your startup by proving the short- and long-term viability of your business model. Generating revenue is perhaps the most straightforward strategy for proving the viability of your business model, and doing so will increase the likelihood you are ultimately able to secure the venture capital funding you are seeking.
Identify the Ideal Venture Capital Partner
It is worth reiterating the fact that venture capital firms are investing in a partnership with you and your startup. It is also the case that most firms want to be able to exert some level of control or have some kind of influence over the company in order to protect their investment. Make sure you are keenly aware of which firms are most likely to align with your short- and long-term business goals before you begin asking for funding, otherwise you increase the likelihood of introducing an unnecessary risk that might eventually undermine the success of your startup venture.
About the author — Kareem Elsirafy, Managing Partner Modus Capital
Entrepreneur and organizational architect, Kareem Elsirafy is known for providing expert strategic planning advice by leveraging his unique understanding of causal relationship economics as well as operational design.