Securing financing is the major challenge for small businesses especially for startups. Small business owners in almost every industry struggle to obtain capital to enliven their business ideas. However, getting a business loan isn’t your only option. There are other forms of raising capital for your small business such as Venture Capital.
What Is Venture Capital?
A Venture capital (VC) refers to the financing offered by investors or investment banks to small and medium-sized businesses that have growth potential. A venture capital assistance can be in the form of expertise or management apart from financing. The venture capitalist invests in a small business in exchange for equity. If you’re interested in raising venture capital for your small business, here’s everything you need to know to get started.
Pros of Venture Capital
- You can quickly raise large financing— even entry-level venture rounds can fund millions of dollars.
- The funding is offered by experienced investors, which can provide guidance and support for your business.
- Closing a VC round will also get your small business attention in the industry. Being picked by a top-tier VC fund means you’re doing something great.
Cons of Venture Capital
- Qualifying for venture capital is very challenging
- Your need to be operating in an area with an active VC community
- The lengthy application process with lots of meetings
- Strings attached to the VC financing
- You’re giving up equity in your business
- Investors can even dismiss you if you fail to reach the agreed milestones
- They might ask you to sell the company in the future, so they can bank in their profit.
Evaluate Your Business Value
When venture capitalists invest their money into your small business, they’re typically interested in your business worth and their return on investment (ROI). Therefore, before you embark on securing venture capital funding for your small business, it’s important to evaluate how much your business worth and what you have to offer.
Evaluating a business’s worth is a complex task, which is why more venture capitalists get assistance from professional appraisers to assess the potential of a small business. The business age, growth rate, senior management, revenues, cash flow, patents or other intellectual property are typically considered when evaluating a small business value.
Before approaching venture capitalists for funding, make sure you have the following things ready for them:
- Financial projections to demonstrate realistic ROI
- Liabilities and the equity you’ve already issued
- Sales and marketing
- Business model
- Historic revenues
- Balance sheets and operating budget
- Cost of customer acquisition and their lifetime value
Assess How Much Your Business Needs
Another important thing you should know before approaching a venture capitalist is how much your business needs. Understanding your funding requirements is crucial— the less you raise, the less you give up to a venture capitalist. The same rule works for venture capitalists – the less they invest, the less stake that asks for in your business.
Considering how much capital your business, how much your business is established and much capital you can use instantly and efficiently and how much equity you’re willing to give up to new investors is important before you approach a venture capitalist. According to experts, asking for the minimum venture capital amount that can get you to your tipping point will help in changing the risk profile of your business considerably. The amount you raise with venture capital will likely become clear as you conclude your financial forecasts in the assessment process.
Preparing Pitch for the Venture Capitalist
Early preparation is the key to secure venture capital funding. Every year, venture capitalists receive thousands of inquiries for financial help, so you need to position yourself to make your business worthy of investment.
Start with preparing a pitch presentation for the venture capitalist, be honest, and keep it concise—making it easier for investors to clearly understand your unique idea.
You should also state in your pitch about your short-term and long-term goals, how you’ll solve your future customers’ problem, and why your unique business idea is ready for the market.
Qualifying for Venture Capital
If your business can scale quickly and potentially become profitable, venture capital funding is for you. Investors are less interested in helping businesses that only operate with a profitable idea. The show “Shark Tank: features the businesses that are potentially fundable, like a viral app or a new trendy product that every person might purchase.
Besides matching the qualification criteria of venture capital, your business also requires to be established to secure venture capital. Your business product should be ready and you have shown that you can generate money.
How to Approach Venture Capital Investors
Most business owners perceive venture capital investors as contestants on “Shark Tank,” and aren’t sure how to find them. The best to approach venture capital investors are referrals from friends, local banks, lawyers, or CPAs. You also find them in equity conferences or industry events. The investment from VC generally derives from building trust and personal relationships over a period. When meeting venture capital investors, consider every meeting an opportunity and bring along a solid pitch to each meeting.
Other Ways to Raise Money
If your business unable to secure venture capital funding, don’t worry, there are many other ways to raise money. Instead of reaching out to a VC fund, try to find local angel investors in the area. You’ll find many small business investors that’ll be willing to invest their money into small businesses, but you’d still need to cede equity in your business.
Another most suitable way to secure money is by applying for a small business loan from online lenders. These lenders typically have easier qualification requirements than traditional lenders and let you obtain money instantly, with a decision in 24hrs and cash within a few days. Later, if you’re able to qualify for venture capital or other types of funding, you can repay your small business loan.
Raising money from VC funding isn’t the common way for small businesses, though it might get the biggest headlines. Even if you have a chance with VC funding, make sure to take into account other financing options as well.