What You Should Know before Pursuing Venture Capital Funding
Aspiring entrepreneurs are always looking to acquire capital for their businesses, and venture capital is one of the most sought-after sources of startup funding. In the early stages of a startup, an entrepreneur can seek out a venture capital firm for funding to take their business to the next stage of growth.
Venture capitalists like S-Cubed Capital’s managing partner Mark Stevens make direct investments in early-stage companies. If you are looking for venture capital for your business, there are a few things to know about the process before getting started. Here is an explanation of venture capital funding and a few ways to go about obtaining it for your business:
What is venture capital funding?
Venture capital (VC) is a type of financing that provides funds to a company prior to an IPO initial public offering (IPO) in the form of an investment, as opposed to a loan. This money comes from small groups or individuals called venture capitalists. Venture capitalists want a large return on investments (ROI) of between five and 15 times ROI, typically through an IPO on the stock market or a private buyout of shares.
Not all businesses are suited for venture capital funding. Although a VC investment deal’s structure can vary by firm, venture capital firms generally look to invest in companies with high startup costs, the potential to scale up quickly, and an innovative idea with the possibility of changing an aspect of a certain market segment.
A relationship with a venture capital firm is a long-term investment; they will likely stay with your company and want to give input on how it is run for many years. Venture capitalists often offer funding in exchange for equity or partial ownership. Typically, they remain involved until the company is either acquired by a larger enterprise or private equity firm or goes public on the stock market through an IPO.
How can you prepare?
If you decide that venture capital funding is the right decision for your company, it is important to put forward more than a great idea. Venture capitalists look for several key characteristics in companies to determine which ones to invest in. In order to obtain their funding, it is necessary to meet certain expectations. Among the first aspects, they’ll look for is an excellent management team that has the attributes required to grow the business. Because their investment is potentially a long-term partnership, venture capitalists want to feel confident with the leaders you have on board.
Another factor that venture capitalists consider is the issue of market opportunity. They are looking for companies that have the potential to scale and become big players in profitable markets. Therefore, it’s critical to ensure sure that your idea is innovative enough to perform well and secure a big portion of the intended market. For many investors, this means a market opportunity that can achieve more than $1 billion in sales each year.
Before you seek venture capital funding, it’s advantageous to be able to demonstrate some early traction or customer base that is interested in your product. Many entrepreneurs make the mistake of pursuing venture capital before their idea has had enough time to become more than a concept. It’s important to show promise as a successful business venture before you can expect a venture capitalist to consider offering funding. Venture capitalists often look for traction signs such as customer testimonials, a minimum viable product, strategic partnerships, pilot customers, and admission into incubators or other accelerator programs.
Don’t forget the numbers.
The best entrepreneurs understand how to communicate the value of their business through the numbers, such as the financials and key metrics. To attract the interest of venture capitalists, you need to explain how you can use their funding to drive your business. For instance, it’s paramount to know and understand your metrics and be able to articulate what they mean accurately. You’ll also need to learn your company’s key performance indicators (KPIs) and have a focused vision of where you will be in a few years’ time.
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