Venture capital (VC) is an option for an early-stage business looking to raise the seed funding for proof of concept. Through VC, though, you are more likely to engage with them in later investment rounds, which at Series A stage onwards can be many millions and they often invest in cycles of 5 to 7 years.
However, VC offers more than just money. Most venture capital firms will provide strategic advice to shape the running of your company whilst adding value and improving your chances of success. This includes giving you access to opportunities and resources that will assist your long-term growth.
Although VC may provide a high reward to businesses, it’s not easy to get accepted. Data shows the acceptance rate is at about 0.05%. Venture capitals tend to look for companies that can provide vast potential, with a commercially viable value proposition and strong management. If you can offer this, you’re more likely to be accepted – even if your venture is risky.
If you believe venture capital could be suitable for your business, the first step is applying. However, the process isn’t always as straightforward as submitting an application. Below, we’ve listed the steps to accessing VC for your company.
- Finding a venture capitalist firm
- Try to find a connection
- Create a great proposal
- Review the term sheet
- Get a business valuation
- Undergo due diligence
- Negotiate an agreement
Finding a venture capitalist firm
The first milestone in securing venture capital is finding a firm that suits your business. Most VCs will focus on specific sectors, geographies or growth stages, so you will need to identify one that aligns with your company. The Entrepreneur Handbook has a list of UK firms that may help you with your search.
While searching for a VC firm, it’s worth reviewing their criteria which is generally available on their website. This should give an insight into whether you will be eligible before you waste time making an application that is highly unlikely to be accepted.
If you are confident after conducting your research that a firm aligns with your early-stage company and that you stand a good chance of being considered based on their criteria or past work, you can progress onto the next step of the process.
Try to find a connection
Due to the low acceptance rate for VC, having a warm lead can be valuable in getting introduced to a firm and pitching your business. Check if any of your contacts have any ins with venture capital, either through their connections or if they have worked alongside a firm before.
If you don’t have any relevant contacts, it might be time to grow your relationships through networking. The BVCA and other industry associations hold networking events for those interested in venture capital, and there are other popular opportunities, such as the Venture Capital World Summit. By attending events like these, you will learn more about venture capital while gaining access to people within VC firms, enabling you to find leads for your journey.
Create a great proposal
Once you’ve managed to get yourself in front of a venture capitalist, you will have already overcome a significant hurdle. Now, it’s essential to use your time wisely and make sure your business stands out in the eyes of the VCs you are approaching.
The main aim of your pitch will be to showcase the potential of your entrepreneurial idea and convince the audience that you are worth investing in. This means creating an engaging pitch deck that tells the right story while proving the viability of your products or services. You will also need to clarify the target customers of your business and highlight how you will drive demand. Other factors to include will be your management team, and any other strengths your company has that would lead to long-term success.
Your business plan will also be a crucial element here. It acts as a supporting document that you have considered all the aspects of your company that will allow it to run effectively, with financial evidence of your growth potential and ability to scale. While the pitch should draw in the investor, the business plan should provide the gritty detail that backs up your claims and allows them to undertake their due diligence.
By creating a solid pitch and business plan, you should stand a better chance of capturing the interest of VCs and persuading them that your business is the one to support. Remember to focus on what makes you valuable – both in the eyes of an investor and your customers – and how you differentiate from what’s already in the market. This will help the VCs to understand your growth potential, which will be their key driver.
Review the term sheet
If you are lucky enough to succeed with your pitch, the next stage is reviewing the term sheet given by the VC firm. It’s important to note that this sheet does not mean you have been accepted – however, it’s a good gauge that the firm is interested in your business and wants to find out more.
The term sheet will explain the process of your relationship with the venture capitalist, including any conditions you need to agree to before making a formal agreement. It’s essential to spend time going through the term sheet to make sure you are on board with anything in detail before going any further. This will enable you to check that the VC is a good match for your business and you’re happy with the potential impact on your company.
At this point, the term sheet is non-binding. Due to this, it would be timely to negotiate any issues you may have so that you can find a compromise before progressing so that both sides get the relationship they want.
Get a business valuation
Many VC firms will ask for a business valuation to get a financial estimate of what your company is worth. This is known as a ‘pre-money’ valuation, as it pertains to the business before any capital being invested.
Several factors will determine your value, including past experiences or success associated with the founders, market size, any technology/products already developed, initial traction, valuations of comparable companies, recurring revenue opportunity and even the state of the economy.
The valuation will also affect how much money you may receive. Typically, a higher valuation means less share dilution, while a lower valuation means the VC has a bigger stake in your business (in comparison to its overall value). This means there is less risk for them so that they might be more interested in your enterprise.
Undergo due diligence
Every investor, including venture capitalists, will need to undertake their due diligence before they decide to work with any business. As we’ve already touched upon, your business plan will play a significant role during this stage, showing the scope of the market, how you intend to operate and giving evidence of your potential.
There may be additional information a VC requires before they make an offer, and you should be prepared to give it to them. You must be honest in any answers you provide and offer transparency. If you make false claims, an investor is likely to uncover it anyway, and you will lose credibility – and possibly the chance for funding with it.
Negotiate an agreement
Once you have successfully captured the attention of a venture capitalist, agreed to a term sheet and passed their due diligence checks, the final step of the application process is negotiating an agreement that works for both sides.
The agreement will usually set out aspects like share types, expected return on investment, the Board of Directors, shareholder rights, confidentiality, dispute handling, etc. Essentially, it will dictate how the relationship will operate between all parties and tie both the business and investors to specific expectations.
Take your time at this stage as it is your last chance to iron out any issues and create an agreement that matches your preferences and entrepreneurial vision. It’s also worth noting that, at this point, the VC will be committed to your business and its value so that you may have more room for manoeuvre.
Once the agreement is signed, you’re bound to it – and your venture capital journey can truly begin.
Conclusion
Venture capital is a beneficial form of equity finance, even for early-stage companies that offer high growth. However, in exchange for the reward of funding and hands-on guidance that can support the longevity and performance of your company, you need to be prepared to overcome the application hurdles.
With a low acceptance rate, securing VC investment is no mean feat. You need to be ready to find a connection in the sector and showcase the value of your business while ensuring you meet the criteria the VC is looking to fulfil and providing a strong plan that proves your worth.
It’s not always an easy process – but if you’re successful, it could forge the foundations for a company that delivers exceptional revenue and operates for years to come.
If you are seeking venture capital for your business, we have access to a wide range of contacts who can assist you. Get in touch today so that we can discuss your needs and find a fit.