Venture Capital Funding For Startups: The Ultimate Guide

Looking for information on how to raise venture capital funding for startups?

Venture capital firms are the most famous source of funding for startups. They are often seen as the ‘holy grail’ of financing sources for entrepreneurs. Mostly due to the headlines they fuel, the feeling of success, and the large amounts of capital that they can provide.

However, VCs are just one of many sources of funding for startups. It is important for founders to understand their real role in the life of a startup. As well as the pros and cons of taking their money, how to successfully pitch and work with them, and the alternatives when it isn’t the right fit at the moment.

Startup Fundraising

Startups require funding. There are lots of ways to bootstrap and operate leanly. Yet, they cost money to start up, run, and grow.

Just some of your expenses may include company formation, legal advice, marketing, pitch deck creation, transportation, communications, devices to work on, domain names and hosting, insurance, and fundraising. That’s not counting any product design, manufacturing, or inventory.

Then you need more marketing, fundraising, sales, infrastructure, and team members to keep on growing.

Today, it seems that these cash injection requirements are virtually endless. It is not uncommon to see startups continue raising through a Series F round. Then ultimately going public, or being acquired.

Venture capitalists are not the only source of this funding. Yet, they do continue to be among the most coveted and influential.

Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here)  that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Venture Capital Funding

Venture capital funding for startups comes from venture capital firms. These are funds or companies with multiple funds.

These firms raise money from other investors, individuals or institutions who are often referred to as LPs (Limited Partners). The firm is responsible for investing that money into businesses. Most often startups.

The VC finds the deals, vets them, negotiates, and handles all of the paperwork and transaction. To varying degrees, they are involved in the ongoing progress of the companies that they invest in. Until they are able to secure an exit and pay back their own investors.

These interactions between VC firms and startup entrepreneurs happen through their individual partners. Every partner is a human with their own preferences, personalities, and thesis.

Venture Capital may be the most famous type of funding, but it isn’t the only type. While it is always evolving, it is just one piece of the financial puzzle for entrepreneurs. It is typically not the first stop on the fundraising journey for most startup ventures.

Where Venture Capital Investors Fit In The Capital Stack

Where does venture capital funding for startups fit into your new business and financial needs?

Most startup entrepreneurs are going to be sorely disappointed and shocked with the results they get if they try to immediately go out and hunt down and pitch VCs right out of the gate. Everything has its place and role on the journey.

Family & Friends

If you can’t afford to fully self-fund your startup venture, or at least in combination with the startup capital your cofounders are bringing to the table, then your first stop should be your friends and family.

Go through your personal network and connections, and who they know to find the initial money you need.

They may not have a ton of capital to give you. Yet, it is a great sign that those who know you best believe in you enough to bet their money on you.

This should be the simplest, fastest, and most profitable money you’ll raise on this journey.

Startup Accelerators

Startup accelerators have emerged as an important part of the startup ecosystem. There are many of them today. Not all provide the same amount of value and credibility. Though graduating from others can certainly set startups on a strong trajectory.

Accelerators may provide anywhere from $10k to $120k in initial funding. Then rush you through to a demo day where you will present in front of the next level of investors.

It is not always easy to get into the best accelerators, but it does seem well worth it if you need the guidance, support, and structure.

Angel Investors

Angel investors have been playing an increasing role in the startup ecosystem.

These can range from individual amateur investors in your personal network, to professional investors who do this full time, those that have built and sold their own startups for billions, and even angel groups, or celebrity angels.

They will be more demanding than your friends and family, but less so than VC firms. The amount of money they are likely to invest also lines up with that place in the system.

Venture Capital Firms

Venture capital firms can bring both a lot of money and a lot of experience to the table.

They will be the most challenging sources of capital you have pitched up to this point. That’s the price of getting the money, and enrolling their help.

VC firms have broadened their involvement. They now may be seen participating in funding early-stage startups to even later-stage companies.

There are now many VC funds all over the world, with different niches they prefer investing in.

Corporate & Private Equity

Corporations and private equity firms are also playing a larger role in financing startups. While they’ve often come in to acquire startups or take major stakes before acquisitions, they are increasingly engaging in funding startups earlier in the journey as well.

Another lens through which to look at your startup funding journey is by way of financing rounds.

This roadmap may include:

• Pre-Seed
• Seed
• Series A
• Series B
• Series C to F

You’ll often find VCs participating from the Series A or sometimes Seed round onwards.

Startups also often find themselves pitching for ‘extension’ rounds in between to keep them financially fueled to hit the next major milestones and qualify for the next level of investors.

How To Pitch Venture Investors To Fund Your Startup

If VCs are right for your venture, and the stage of business you are at, how do you get them to invest in your company?

There are several pieces to this puzzle, including understanding the needs, demands, and priorities of venture capitalists, creating your shortlist of target investors, and then successfully pitching and negotiating with them.

What Venture Capital Investors Want

Expect venture capital firms to be more demanding than angel investors and other funding sources. They are putting a lot on the line, and carry a lot of responsibility.

You are probably not just going to wing it with an idea and a smile.

They will evaluate you on factors including:

• The strength of your executive team
• How well you present your story and vision
• The quality of your product and user experience
• The number of users and revenues you are bringing in
• Your month over month rate of growth
• The size of the potential of your business
• Your competitive advantage and moat around your business

One big difference with institutional investors like these is that they will conduct thorough due diligence on your startup to back all this up. They need to verify everything you’ve stated and more. They’ll dig into your backgrounds, talk to customers, and review your finances and projections, as well as IP. This is why venture capital funding for startups can be time-consuming.

Pitching & Presentation Material

Expectations of your pitch deck and materials will be even higher with VCs as well. It has to look good, flow well, and follow best practices.

At this stage a great pitch deck should:

• Follow the expected flow of content and slides
• Good visuals and meaningful data
• Clear and easy to digest messaging
• Examples of tangible progress and traction
• Easily navigable, shareable, and actionable
• Around 10 to 16 slides

Relationship Building

Pitching investors is like pitching customers and getting a sale. Only on a whole other level. Consider the size of your average sale and the amount of money and trust you are asking for from these potential investors.

This always works best when you’ve built and established relationships with the individual partners of venture capital firms well ahead of your funding needs.

This is a process that can take months and years. So, make sure that you are thinking far ahead, and are making and nurturing these connections that far in advance.

Understanding the pros and cons of venture capital is always advisable before you initiate the pitching process. Check out this video I have created explaining the critical factors to keep in mind. You’ll find them in text form below for reading ahead.

Pros & Cons Of Using VC Investors To Fund Your Startup

There are pros and cons to everything in business, including venture capital funding for startups. That can certainly apply here too.

Dilution

One of the biggest concerns and considerations with accepting equity investments from VCs is the potential for dilution.

The more you raise, and the more investors you bring in, the more watered down your stock and stake can be. That has meant some founders have sold their startups for a billion dollars and have had to walk away with virtually nothing.

It is a choice between going bigger faster, and having a smaller piece of a bigger pie, or being happier with a much larger piece of a far smaller pie. There are founders who are fans of both options.

Control

The dilution issue isn’t just directly financial either. It is also about the control of your business, and decision-making.

VCs are going to want board seats and voting rights. That control can not just impact daily operational choices, but future fundraising, exit opportunities, and even the security of your own job and paycheck.

For many, it can make all the difference between being able to make the design and operation decisions that are in line with their values and mission.

Added Value

One of the best advantages of working with VCs isn’t just the money. It is the other help they can provide.

They should have a tremendous amount of experience. They have all types of connections for recruiting, funding, and sales channels.

If you can extract and leverage all of this, it will make a huge difference in your trajectory, and speed. Every entrepreneur should take the time to understand how venture capital funding for startups works.

Where To Find VC Investors For Your Funding Needs

There are countless venture capital firms out there today. Some are very famous. Others not so much. Some may seem to offer a lot of credibility. Though it is really about finding the right fit.

So, instead of just hitting the White Pages or Google and calling down the list, begin by understanding your need, who will be the best fit, and create a shortlist of criteria and ideal investors.

Even then it may take hundreds of pitches to get that first check. Though the more focused you are, and the warmer the connection, the higher your chances of landing the money.

You may find them through:

• Startup accelerator programs
• Fundraising consultants and advisors
• Your previous investors
• Networking and attending events
• Introductions from your network
• Attracting them inbound through your progress and press

Alternatives To Venture Capital Funding

If VC money isn’t right for you right now, there are other options. Including the following:

• Self-funding
• Friends and family
• Angel investors and angel groups
• Public crowdfunding
• Financing from partners and customers
• Using debt investments and credit
• Private equity firms

Summary

Venture capital funding for startups is a big deal for entrepreneurs. It has proven to be instrumental in building hyper-successful companies.

Of course, there are those entrepreneurs that have had their negative experiences with VCs too. It is about understanding the pros and cons, how they fit in, and how to pick the best investors and work with them well.

Get this right, and you could get a lot more than just the money you want.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.