Startups looking for financing options often turn to Venture Capital firms to obtain their business financing. Despite providing capital, these firms also provide strategic assistance such as introductions to potential employees, partners and customers and many more. However, business finance is not easy to close or obtain. Entrepreneurs should prepare before engaging by understanding the anticipated deal terms, the process, and the potential issues that might arise.
Obtaining Venture Capital Finance
In the process of securing venture financing, it’s essential to note that venture capitalists focus their investment terms or efforts using one or a combination of the following principles:
- Geography – the geographical location of the business.
- Specific industry sectors – Examples: mobile devices, digital media, biotech, software etc.
- Stage of the company, i.e. whether the business is at early stages, round series or later stages.
Before you approach any venture capitalist, find out whether their focus aligns with your business goals and its stage of development. Another thing you should know is that venture capitalists get inundated with investment prospects made through unsolicited emails. Most probably all those unwanted emails are not given attentiveness. The most excellent way to get through their attention is to have a warm introduction through a lawyer, colleague, and entrepreneur known to the Venture Capitalist. To attract the interest of a Venture Capitalist, a startup must have a sturdy investor pitch deck and a good “elevator pitch”.
The venture process can be very time-consuming. Startups must understand that just getting a meeting with a principle of a venture capital firm can take several weeks. A series of meetings, conversations and presentations to all partners of the venture capital fund then follows. Then, there is the negotiation and issuance of a term sheet. All these require due diligence, and the process involves negotiation and drafting of numerous legal documents by lawyers from both sides. The whole process now becomes evidence of the investment.
Why Might Venture Capital Be A Bad Idea?
There are some downsides when it comes to venture capital financing. One of the negatives experienced by some entrepreneurs is the loss of power and control of their business in exchange for that cash that sometimes can lead to some unpleasant realities.
Venture capitalists emphasize the principle of “growth at all costs”, which makes sense to them anyway. From their perspective, it is a game of numbers, and the more opportunities they have to fund for quick business growth, the likelier they are to find the next unicorn. But, this doesn’t make much sense to startups as to them scaling fast can kill a startup.
The high-pressure scaling has another disadvantage in that you can find yourself not as wealthy as you thought. Remember, in every round of funding, you give up a little more control and some ownership stake of the business to the Venture Capital funders.
Ultimately, your interests may not necessarily align entirely with your capital funders. Sometimes it’s easy to forget that, especially when it looks like they are cheering you on to glory. Each stage of development has different associated risks, challenges and goals. Making a mistake in this area can prove expensive for years to come. Always remember, different kinds of funding are appropriate for each stage.
Is Venture Capital Financing A Good Idea For Your Company?
Besides capital venture funds, there are other funding options available for your business. However, for startups that demonstrate the potential for high degrees of growth, venture capital finance might be the best path forward.
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