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How To Get Venture Capital Funding [ A 7-Step Venture Capital Funding Process ]

Are you looking for an investment for your startup through a venture capitalist? Then this blog post is a must-read for you. This blog post will guide you step by step through the venture capital funding process. In other words, this write-up will give you a complete idea on how to find a  venture capitalist in a right way. I call this the “7-Step Process Of Getting Funded By A Venture Capitalist”. This write up will also answer your question – “ How To Get Venture Capital Funding ”.

How To Get Venture Capital Funding [ A 7-Step Venture Capital Funding Process ]:

 

How To Get Venture Capital Funding

 

Step #1: Understanding What venture capitalists(VCs) Want

The very first step in the venture capital funding process is to understand what the venture capitalist actually wants. Many entrepreneurs fail to raise venture capital  funding not because they do not have a great idea, but they lack the understanding of what the venture capitalist actually want. If you are clear with what venture capitalists  look for in a founder and a startup to invest, you can automatically fine tune your startup idea (after a careful thought) and it becomes easy to find a venture capitalist. So the list of what venture capitalists want is given below:

  • Venture Capitalists look for startups which are working in a domain that venture capitalists are comfortable or experienced with. Most of the times this is the case. For example, if a VC Partner has vast experience in healthcare, he/she would show interest in such startups that primarily works in the healthcare space. This is called “sweet spot” by Jeffrey Bussgang, General Partner, Flybridge Capital Partners (A Venture Capital Firm).
  • The entrepreneur’s extraordinary “passion” and a compelling “vision” to bring in a change to the world through his/her startup. The venture capitalist will observe this through the entrepreneur’s pitch. To be precise, venture capitalists do not want to work with entrepreneurs, who have a wishful thinking of becoming an entrepreneur just to fulfill their desire to be called as entrepreneurs and stay in the limelight to seek everybody’s attention. The easy way such people find to achieve their wishful dream is by raising venture capital funding (in which they will fail). According to venture capitalists, such entrepreneurs almost always fail. Pitch to your venture capitalists by telling them how your startup idea can impact people’s lives in large (your vision) and demonstrate how passionate you are about doing it. If you have approached a venture capitalist after being early funded or seed funded by other investors, then, you can highlight your startup progress made by utilizing those funds. Passion for your work is demonstrated there too.
  • A winning team – a team that gets your vision executed. In other words, a team that brings the startup vision to life. Venture Capitalists want to know how strong is your team and its network. A rightly networked team (having experienced advisors)  is bound to make success happen. So, while pitching to venture capitalists, get prepared with every single thing possible to demonstrate how strongly you can execute your startup idea (your previous experiences matters a lot). Do not waste time in applying for a venture capital funding without a strong winning team on your side.
  • Venture Capitalists love investing in a progressive startup. Usually, venture capitalists invest in early stage and late stage startups which has shown consistent progress. They wish to invest in a startup that is exponentially progressing in terms of team size, customers, and revenues among others. Your startup name should not be new in the startup space. Your startup should be buzzing around for all the good reasons in the startup space. In some cases, a VC may reject for the first time. You go back after two months to the same VC with a progress report of two months, and, your startup has high chances of getting funded by the venture capitalist. This is what I mean by saying, venture capitalists love investing in progressive startups.

To know how to create buzz around your startup, you must read this blog post: 10 Ways To Create Buzz Around Your Startup

Step #2: Identify The Right Venture Capitalist(VC) For Your Startup Vertical

This is a very important part of the venture capital funding process, but still the most overlooked one. Once you understand what exactly a venture capitalist looks for in an entrepreneur and his/her startup, your next task is to short list your potential venture capitalists. Not every venture capitalists are great for your startup. You must choose your venture capitalists right to avoid later stage problems. Before going for a hunt to find venture capital investors, keep the below parameters in mind.

  • Venture Capitalists should be financially very strong
  • Venture Capitalists should have incredible domain expertise
  • Venture Capitalists should a strong network
  • Venture Capitalists should have a high degree of patience
  • Venture Capitalists should be trustworthy
  • Venture Capitalists should have a high level of integrity
  • Venture Capitalists should have quick decision-making skills
  • Venture Capitalists should enjoy working with entrepreneurs

To get into the details of each and every point you should refer my blog post on 8 Top Qualities To Look For In Angel Investor [And venture capitalist]

Step #3: Getting Your Pitch Ready To Get Venture Capital Funding

The third step in the venture capital funding process is to get your pitch ready. Once you have identified your potential venture capitalists, it’s now time to get your pitch ready. A pitch is a way to sell your idea and your vision. When you meet a venture capitalist, they will ask you to pitch to them about your startup. So get your pitch ready. Your pitch will be the entry gate towards landing investments from a venture capitalist. The success of your startup’s fundraising from venture capitalists depends on how nicely you can pitch to them. So its absolutely necessary to prepare a fund winning pitch. You can pitch to the venture capitalists in 3 ways:

  • Elevator Pitch ( during your first quick introduction – 30 seconds)
  • Pitch Deck ( a quick powerpoint presentation – mostly during your second meet)
  • Story Telling ( a quick and detailed way to describe your startup )

You should refer these below three blog posts to understand how to prepare an Elevator Pitch, a Pitch Deck and Stories to pitch

Step #4: Get Your Due Diligence Documents Ready

There are stories of investors taking back their word after agreeing to invest just because the startup founders were not ready with their due diligence documents pertaining to the company. Taking several weeks to get your documents ready shows your poor quality of document maintenance and unpreparedness to seek funding. To get venture capital funding, being prepared with all the due diligence documents is a must – even before you meet the Venture Capitalist. 

Therefore, make sure you have all the documents ready in your google drive or Dropbox. You should be quick enough to share the documents immediately when an investor asks for it. If you want to know about the due diligence documents that need to be kept ready, you should go through this blog post: Startup Due Diligence Checklist To Get Venture Capital Funding

Step #5: Get Introduced To A venture capitalist

This step answers your question – “How To Meet Venture Capitalists”. If you are ready with your pitch materials, get ready to catch up with a venture capitalist (VC). This is the toughest of all steps in the venture capital funding process – Getting Introduced To A Venture Capitalist. But not impossible. The common mistake first-time entrepreneurs make is – an attempt to cold call the venture capitalist ( either through e-mail or by calling the VC firm reception).  In other words, first-time entrepreneurs send the startup pitch, team, idea/product/service/project explanation through e-mail expecting a call from a venture capitalist. This is the sure way to failure.

Please keep this in mind – “Cold Calling A VC” does not work. Because there are several other thousands of startup entrepreneurs doing the same thing. The success rate of cold calling is around 5000: 1, which means out of 5000 applications, 1  might get a return call from a VC asking for their pitch. Even that “1” is not guaranteed to get venture capital investment (funding) [ Sometimes referred to Venture Capital Financing ]

Venture Capitalist are the ones who have a strong network among their peers. including other venture capitalists and entrepreneurs. And they expect entrepreneurs also to be of the same characteristics. If you want to make it to the venture capitalist table, you got to approach through right connections/contacts. In simple words, a great referral through someone who is most trusted by the approaching venture capitalist. For example, a VC will show interest to meet a first-time entrepreneur, if he/she has been introduced by another entrepreneur who has won the trust of the venture capitalist through their earlier business relationship. Or, if he/she has been introduced by some other well-known personality in the startup space. This is because, when a successful person introduces someone, their trust in the latter increases. It is a stamp of approval of the quality of the founder, his/her startup and their product/service. Better the introduction, the better the chances of getting funded by the venture capitalist.

If you are not aware of anyone who can introduce you to a VC, then, make use of the tool LinkedIn.  Connect with other entrepreneurs, venture capitalists, angel investors, people in senior most management level in a company etc. Do not directly ask for referrals. Firstly, make sure they notice your work through regular posting, commenting on their posts, sharing what they post, interactive about their interests etc. There are several ways to get connected to them through LinkedIn. Whatever you do, your idea should be to gain their attention towards you in a positive way. Nurture the connections. Once you feel, you have built enough relationship with them, start approaching them with your desire to meet venture capitalists. This way definitely works.

You can also try online tools to find a venture capitalist for your startups. There are plenty of tools both paid and free versions for you to sign up. You can choose a type of subscription based on your need. You can connect to most of the venture capitalists through such online tools like CrunchBase.com, MatterMark.com,  CBInsights.com and VentureDeal.com . You get high-value connections through these online portals. Many successful startups have obtained venture capital funding through such online tools.

[Keep This In Mind: The straightforward answer to the question “How To Get Venture Capital Funding” is “Make More And More Healthy Connections

If you want a detailed idea, you should read my blog post on: 13 Ways To Find Investors For Your Startup

Step #6: Pitch To The venture capitalist

After receiving an introduction and if the venture capitalist has shown genuine interest in your startup, you would be asked to meet the VC partners (General Partner / Managing Partner) for delivering your pitch.  Before asking you to meet, most of the times, the team at VC firm might first ask you to send a presentation pitch through email. If it is found very interesting, you would be asked to catch up with the VC partners on a face to face level. You will be asked several questions related to startup and its progress and why should they invest in your startup and several other questions. To know all the questions that a venture capitalist asks, you should go through my blog post on: 75 Questions Asked By venture capitalists To Startup Founders Before Funding

My sincere suggestion to you is that, don’t promise to over-deliver in returns to the venture capitalist just for the sake of securing funds. Firstly, as venture capitalists are experienced professionals, they know how much you can deliver and they dislike people trying to fool them. Secondly, after funding, if you could not deliver what you promised, you will lose your reputation. But over-delivering without promising is a great characteristics of a good startup. Before applying for venture capital funding, be prepared with “what you can” and “what you cannot” promise to the venture capitalists.

If the VC partner is happy and satisfied with your presentation, and if you have successfully addressed every question well, then, you will be invited to present it to other partners of the venture capital firm. On that particular day, all decision-making partners will be in the same room with you. This is the last step in the meeting process and this meeting with culminate with signing a term sheet.

Step #7: Receive Term Sheet And Get Funded

This is the last step in the venture capital funding process. You will receive a term sheet if you were able to convince the partners in the meeting by answering all their questions. Remember the term sheet is not an agreement to give you funds, it is only a short term agreement which indicates that, both parties – entrepreneur and venture capital firm has decided to work together after a complete due diligence process gets over.  During this stage of venture capital funding process, a complete back ground verification of the startup and the founder is done and if there are no red flags, the Venture Capital firm is good to go to invest in your startup and your startup gets venture capital funding. The due diligence process might take two or three months of time. It is only after the due diligence process you get your funds into your bank account.

Congratulations, you have raised a seven-figure fund.

Hope you enjoyed reading this blog post on “7 Step Process Of Getting Funded By A venture capitalist” and learned a lot. Feel free to comment on your opinions.

Further Reading:

  1. 75 Questions Asked By venture capitalists To Startup Founders Before Funding
  2. 6 Startup Funding Stages [Rounds] Every Entrepreneur Should Know

What Most People Read Before Reading This Blog Post: 

8 Top Qualities To Look For In Angel Investor [And venture capitalist]

About Subhash K U

Subhash K U
Subhash.K.U is India’s leading Business Explorer and highest paid Business Strategist. He is famously known for his business blog BusyMonk.com. He helps aspiring entrepreneurs and business owners to take their businesses to the next level through strategic business programs that he conducts throughout the world. He loves speaking to business owners to learn and understand their successful business models and strategies as he strongly feels that there is no single fixed formula for every kind of business.

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