If you’ve ever watched the show “Shark Tank” then you will have a brief idea of how venture capital firms operate, but surely, they are not equivalent. Their common ground is to offer capital to let a potential business idea off the ground. Without sufficient funding, there is no way to scale your business and sustain its operations. However, this is the killing pain point for a lot of startups. How can they fix it?

Enter venture capital firms. Venture capital financing is one of the fastest-growing solutions for startups that require funding. Discover what is it and how to capitalize on this method of funding and scaling your business. 

Why Startups Should Seek Venture Capital Firms

Startups that seek financing often turn to venture capital firms to obtain the required funding. Raising venture capital is the most accessible solution for startups to generate funding quickly. 

So, what is venture capital? It is a type of financing obtained through private equity firms or group of investors. Venture capital funding typically comes from investment banks, insurance firms, and venture capital firms. Funding is provided in exchange for equity within the company. 

Therefore, payment for the financing does not work like a typical loan from a bank. Venture capitalists that choose to invest in your startup have a long-term investment outlook in the hopes that when the business flourishes, they will get a higher return. These investments typically become part of the firm’s portfolio of investments; therefore, they only take a minority share of the startup they choose to fund. 

It’s not easy to obtain venture capital financing. Most venture capitalists target businesses with high-growth potential for their investments. Therefore, entrepreneurs must be able to showcase why they are a good investment and how they intend to generate returns for the funding. You might need to crunch some numbers here, especially if you want to scale your startup. Depending on how big or small your asking capital may be, expect that other startups are vying for that investors' attention.

WhatsApp is one of the best examples of a startup company that is VC-backed. According to CBINSIGHTS, In 2014, Facebook acquired WhatsApp for $22 Billion. The only venture investor in this deal took home a huge profit out of their $60M investment that grew to be valued at $3 Billion. 

Another example of successful venture capital funding is King Digital Entertainment, the startup that was behind the hugely popular game Candy Crush Saga. The VC  firm Index Ventures invested in the company in 2005 and owned 8% of the company's stake. The firm ended up cash as much as $560M for their investment. 

Expert Tips for Startups to Get Venture Capital Funding

Before you approach a venture capitalist firm, make sure you have a plan in place. VCs expect startup owners to be buttoned up. Keep in mind: they have the funding and they won’t give that away freely to anyone unless you come prepared and can demonstrate how you intend to make their investments pay off. 

With that said, you can take note of these tips to help secure the VC funding you seek to scale your business.

Tip 1: Look for a VC that resonates with your culture.

When looking for potential investors for your startup, the sensible approach would be to reach out to as many potential investors as possible, right? As it turns out, using a more targeted approach is going to boost your chances of finding a firm that would be interested in investing at all.

Start by identifying your business and its story. What is your unique value proposition? What makes your startup unique from all other businesses out there? Do your homework and find venture capital firms that align with your company's culture and values.

By doing your research, you can appeal to the VC firms that are looking for specific types of startups to support. Aside from the opportunity to gain the capital you need to grow and expand your business, these venture capitalists can also provide you with the tangibles that fast-track your way to growth. These firms could help you find industry connections and provide valuable insights to help you succeed in the industry. These values are beneficial to your startup business, beyond the actual funding that you can get from them.

Tip 2: Understand the process.

As you know by now, venture capital funding does not work as a traditional bank loan does. You won't be expected to repay the money over a planned schedule – such as over the next 5 years along with the accompanying interest rate. Instead, the VCs will get a percentage of your company's stake – or they become co-owners of your startup company.

Most VC firms will take minority ownership of the business. However, many venture capitalists like to take an active role in managing their investments, which now includes your startup.

Be prepared with a plan when you consider venture capital as a source of funding for your startup. There is a risk that you could lose control over the company’s decision-making process and direction. You must be clear on all the terms of the ownership upon agreement with the venture capital firm.

Put everything in writing to ensure that the process if legal and that it is beneficial for all parties involved

Tip 3: Craft a Winning Pitch Plan

Just like in ‘Shark Tank’, your pitch is the most important platform for you to communicate your vision for your startup. Make sure to develop a smart, well-detailed, and focused. 

Don’t approach it like a sales pitch but rather a communication plan. Identify what pain points your ideal customers are facing and then present the solution for those pain points (either through your product or service). It is important to also present the potential competitors and your market strategy (how you plan to compete). 

Put yourself in the position of a VC – what will they stand to gain by investing? Make sure you add that in your pitch, too. You can add the ROI target for the investment and be sure to include a time frame. For example, you plan on generating the return on investment in 24 months, or more. Be as specific as possible.

While numbers are good to have in your pitch, you must also be able to demonstrate customer success. Venture capitalists are interested in the numbers but they also see customers as a valuable part of the equation. If you have proof of positive customer experience about your product or service, that’s good to have in your pitch

Tip 4: Expand your network.

Building and growing a startup is not an easy undertaking. Therefore, you don’t have to do it alone. Build and expand your network so that you can learn from others who’ve gone through the same process and have succeeded in doing so.

One example is to join a start-up accelerator program. This is a great opportunity to meet other startups and to participate in mentorship programs. You will be able to learn from the others how you can iron out any knots in your startup journey. These programs are best suited for startups that are at the earliest stages of their company development. You will also have the opportunity to establish connections that make funding easier to access or to align you with VCs in your industry. 

Bottom Line

It's not easy to obtain venture capital funding, especially with the vast number of startups today. Take note of the expert tips above to help match you with the right VC firms and to steer your startup business in the right direction.