A venture-funded startup is financing given to a start-up company or a small business by venture capitalists because they believe it has vast long-term growth potential. The venture capital is provided by investment banks, financially stable investors or any financial institution. The funded startup receives not only the capital of in the form of money only, but it can also be managerial or technical expertise.
If you are seeking finance for your startup, research and know exactly what you need for your business to run smoothly while giving you good returns. It is difficult to find venture financing, and so you must start by understanding the process and potential issues that may arise. Below are some tips to put in mind:
Understand How to Get the Venture Financing
Venture capitalists will choose where to put their money carefully. In most cases they use the following criteria:
- They have an interest in specific industries including digital media, software, biotech, mobile, semiconductor among others
- They identify the stage of your business, which include early-stage funding and later stages where the business may have its significant traction and revenues.
- Geographical location; if a venture capitalist does not specialize with companies from your state or country, no matter promising it may be, they will not help you.
Before you approach venture capitalists, get to know what they focus on. Avoid sending the unsolicited emails because most likely they will be ignored. Instead, find a trusted entrepreneur, a lawyer or a colleague to introduce you to them.
Understand the financing facets
A venture capital financing is documented by the venture capitalists using a term sheet. This document is only issued after the VC firm gets approval from its investment committee. However, term sheets do not guarantee that the deal will go through. You still have a long way to go.
On the other hand, though this term sheet is non-binding, it is the most critical document used when negotiating with the investors. All major issues are covered in this document and the minor ones handled in the in the financing documents which follow later. When seeking venture funding, it is always good to have a comprehensive term sheet as much s possible. It helps to reduce any problems that may arise between you and the investors.
Valuation of Your Business
The business valuation is essential for both the venture capitalist and the entrepreneur. There is no defined formula or method to do the valuation; it is negotiable. Some of the things that influence how valuation is determined include:
- The past success and experience of the business founders. Those referred to as “serial” entrepreneurs are less risky and usually command high valuations
- Market opportunities available for the business.
- The development such as technology that is already developed by the business.
- Any traction by the business including partnerships, favourable publicity, satisfied customers and revenue.
- The average returns of the business model.
- The business model’s capital efficiency. This refers to how the business will cost before it can start giving profits.
- Are other investors are pursuing the business because it’s a hot cake? That means valuation will be higher.
- The economic climate; when the economy is strong and there no slumps, valuations are high.
Venture capital financing is important for successful start-ups. Take your time to understand the primary points in venture funding and you will enjoy the successful outcome. Stable funding ensures a business runs consistently despite the owner lacking the financial or technical muscle to do so.