Great business ideas are often limited by a lack of capital. Without growth capital, innovative ideas remain as seeds, without the water and sunlight needed to grow into a thriving enterprise.
In 2020, the US venture capital industry contributed approximately $548 billion in US venture capital assets under management. That’s a large injection of resources into aspiring startups.
As business owners and leaders of growing businesses venture capital is an option. In order to make the most of the opportunity, proper preparation needs to be done. Let’s explore the steps needed before seeking venture capital.
An Introduction to Venture Capital
Venture capital is one of the many financing options available for entrepreneurs with big ideas but limited money.
Funding from venture capital is treated as an investment and not a loan. It is considered a big risk on part of the individual or small group of venture capitalists. With this in mind, there is a high rate of return required.
There are three main points to note about venture capital when considering venture capital as an option.
- The funds are provided by institutional and private investors
- Growth capital is exchanged for an equity stake or part ownership
- Venture capital investments include long-term partnerships between the two parties
When does a business make the decision to pursue venture capital for growth?
When Is Venture Capital Beneficial?
Although venture capital is one of the most desired forms of funding, there are certain businesses that are more likely to succeed than others.
As a guideline, the following criteria are considered;
- The company requires substantial startup costs
- There is the potential to grow quickly and disrupt an industry
- Innovative projects with the opportunity to reshape a market segment
With so much at stake, it’s important to approach a venture capital partner at the right time. In addition, it’s important to be equipped with the necessary information – about the business and the market.
9 Key Considerations Before Seeking Venture Capital
Before booking a meeting with growth capital investors, there are a few details to know to help with preparation.
Determine Business Goals
The main goal of venture capital firms is to invest in a great idea. However, making the decision to invest usually involves big risks. Understanding the business goals and communicating them in a clear and concise way is essential.
Establish the Business as Corporation
Investors prefer putting their money towards an official business that follows the legal requirements of the state. Research the state that offers the best tax schedule and then take the steps needed for registering a corporation.
Protect Intellectual Property with Patents
Make an effort to protect intellectual property. Venture capital firms are unlikely to invest in an idea that can easily be replicated. Patenting a product or idea is one of the best ways to protect the business idea from being reproduced.
Reach the Appropriate Milestone
Most businesses don’t find success overnight. Even so, growth is expected to be seen in the first couple of years. Ensure that your business is at the appropriate stage to seek investment. Keep in mind that different venture capital firms prefer to invest at different stages.
Arrange All Necessary Paperwork
Walking into a room without the correct preparation could be a wasted opportunity for investment. There are certain documents that need to be prepared before booking a meeting. For example, registration documents, a business plan, and a non-disclosure agreement.
Determine the Capitalization Table
The hope of receiving investment comes at the cost of stock or equity. Determining the capitalization table and how the shares will be distributed and/or tracked needs to be decided before reaching out to venture capital firms.
Prepare Growth Timeline
Venture capital firms invest with the expectation to see fast growth. Understanding the growth timeline of the business is important to convince investors that the milestones are stipulated and action steps planned to achieve each one.
Venture capital investment can shoot a business to the next level, but acquiring venture capital is not a guarantee. There are other options of financing and a realistic backup plan needs to be researched and prepared in the form of a detailed budget.
Prepare for Due Diligence
After managing to hook the investors with a killer pitch, there are subsequent steps to follow. Preparing for due diligence is essential to validate the pitch and showcase that the business is legally operational.
Ready to Receive Venture Capital Investment?
Once confident that the business is in the prime position to approach investors, the next step can be taken. Prepare everything that’s needed for a winning presentation and book a meeting.
Starting a business is an exciting journey, and finances should not be an obstacle preventing the next great idea from disrupting the market. Contact Intrepid Finance at 317-207-2235 to find out more, or apply for investment funding right away.