When your startup is growing, there might be a time when you think you will need Venture capital. Typically, Angel Investors write checks that are considerably lower in value than want Venture Capitalists will write. This simply means that the latter supports the growth of the startup from the seed stage to much later as well.
Since VCs tend to deploy significantly larger amounts of money and they expect higher returns, it can be quite challenging to raise money from them too.
If you are looking to raise some venture capital, here are the things you should be aware of:
Is your business VC backable?
Every founder feels that their ideas are outstanding and that they are more than worthy of an investment. However, the fact is that while most ideas may be worthy of some kind of investment, they might not really be worthy of venture capital investment. For instance, if you are opening up a small restaurant, VCs wouldn’t really be interested in funding it, and a bank loan will be much more suitable option for you.
VCs typically take the size of the market into account and if they feel that isn’t sufficiently large, they won’t be interested in funding your venture. This is why it is important that you understand the size of your market before you go out to raise any money for your venture.
What is the fund & check size?
Before you think of raising money, you need to understand exactly how VCs make their money. They have limited partners as well as general partners. The latter actively manage the money while the former are passive investors and they contribute capital. The general partners make money through management fees and on carry. In short, the VCs don’t really make any money until the entire original money has been paid back. This is why you need to understand what the dynamics between the fund size and the cheque size is.
The other important thing is that Venture Capital investors want to know you better. They want to know who the founders are; they want to see them make progress and execute, before they commit to investing in their venture. Keep all your paperwork and financials ready when you are going to meet the VCs. Raising Venture Capital isn’t child’s play and you need to be well prepared on all fronts.