You’ve gotta spend money to make money.
Money makes the world go round.
Show me the money!
At the end of the day, it all comes down to money, doesn’t it? You can have a proven idea, even the best idea in the world, but if you don’t have the money to make it happen, you might as well be flipping burgers and asking, “Do you want fries with that?”
If you’re here, you’ve probably already googled, “How to get money for my business,” and come across the option of raising venture capital. And now, you’re all, “Yes! That’s the answer! Bring on the venture capital!”
No problem. Just click here and we’ll send it right over—said no venture capital fund, ever.
Like everything in business, securing investment takes a ton of hustle, and a little know how. This is the Foundr life! You’re an entrepreneur! Lucky for you, we’re here to help you find your way.
What Is Venture Capital?
There are many different paths to securing funding for your business. Venture capital (VC) is typically limited to big, often risky ideas that need significant money, but carry high potential for return. We’re talking tens of millions of dollars, not tens of thousands. Venture capitalists are gamblers looking for a big opportunities to make their fortunes another fortune.
If tens or hundreds of thousands will meet your needs, then a loan or angel funding might be a better way to go. Angel funders get involved early, but usually bring smaller amounts than venture capitalists (up to the low millions). And always keep in mind, there are several other funding options for your business to consider if VC is not right for your circumstance.
Or maybe you don’t really need funding at all. You might be able to bootstrap this thing entirely!
“Lady, get real. I came here to find out how to raise millions for my business. Get on with it and tell me what to do!”
Your wish is my command.
Assess yourself! You’ve got to make it. Assess yourself. Hey, hey, hey, hey! (If you did not just sing that to the old Madonna tune “Express Yourself,” then you might need to pause and go steep yourself in 1980s culture. Go ahead. We’ll wait.)
Welcome back. Now, back to the program.
Before approaching venture capitalists, you’ve got to assess whether you have the business or product story and history they’ll expect.
Can you cohesively describe your company in a few short sentences? Can you unpack those sentences into longer presentations? Has the product or idea been tested or vetted in some way? (This is not always required, but is helpful in assuring venture capitalists that the market will devour what you’re offering.) Have you added an element to your idea that cannot be found (or, ideally, duplicated) elsewhere? Think patents, trademarks, and copyrights. Or perhaps even one-of-a-kind branding. Do you have a leadership team that is ready and able to guide your company into a significant growth phase?
Further, has your business established the internal relationships it needs, beyond the leadership team?
Think beyond the people who are aboard primarily because they are passionate about the vision. Look at your internal structure. Do you have an accountant or CFO? Venture capitalists want to know that someone with deep knowledge of financials is involved in how the business is being run.
Venture capitalists often get involved with companies that have a plan to eventually go public. That means your company will need to be audited, either in the process of going public or in the process of fulfilling the fund’s requirements. Get an accountant and/or CFO involved early to make sure the eventual audit goes smoothly.
Is an attorney on board and have they created and vetted all the documents necessary to ensure the business is on solid legal footing?
Having this element reassures a venture capitalist. You might be the best salesperson in the world, but before you, there were Theranos and WeWork and plenty of other grand ideas with persuasive visionaries at the helm. Give venture capitalists the assurance that this isn’t just you and a dream—it’s you and a team.
Take a good look at the stage your company is in.
Are you seed stage? Startup? Early? Mid? Late? The stage of a company is usually a determining factor for what venture capital it can access. This is not something to guess at! Some funds are designed to support early stage businesses and get them to the next stage. Know where you are in the growth journey. You can read about the stages in-depth here.
Once you have your story, your team, and your stage identified, you’ll be able to take the exciting step of finding appropriate venture capital firms to target. They typically divide their investment strategy by industry and stage. While the general consensus is that tech and health are the hot fields for VC, there is plenty of investment out there for other industries as well.
But before you walk into the room or inbox of a venture capitalist, you’ll want to make sure you can talk the talk.
Talk the Talk: The Lingo of Venture Capital World
Here are some of the key terms to know as you chase down investors.
“We got $25 million in Series A funding and are gearing up for a Series B this fall.” In normal people language, you should hear, “We got $25 million the first time we raised venture capital. We’re going to focus on raising more this fall.” It’s just the round of funding you’re seeking. Because the investor’s position can shift drastically from one series to the next, it is important to note up front which series of investing you’re currently undertaking.
AUM/CUM/FUM, Dry Powder
Assets Under Management (AUM), Capital Under Management (CUM), and Funds Under Management (FUM) are all basically the same thing. They all reference how much money the venture capital firm is managing. That number includes, however, the money that is already invested. While that does inform you about the firm’s interests and commitments, it doesn’t give you an idea of how much money they have available. So, while AUM/CUM/FUM is helpful to know, what you really care about is a firm’s Dry Powder. That’s how much money they have available to invest right now.
Regardless of how you feel about math, “multipliers” is a word you will learn to love. This is a way that your company’s value is calculated, which informs investors how much they should gamble on you. Choosing which elements to factor into multipliers is an art in and of itself. There are established multipliers for each industry, though they shift as the market shifts. Generally speaking your EBITDA (Earnings before interest, tax, depreciation and amortization) times your multiplier equals your company’s value.
Unicorn, Decacorn, Hectacorn
Break out the glitter and sparkle, we’ve reached the unicorn section of the article! A unicorn is a startup that has reached $1 billion in valuation. A decacorn is valued at over $10 billion and a hectacorn (or hectocorn) is valued at over $100 billion. (#goals, right?)
General Partner/Managing Partner/Partner/Venture Partner
The General Partner of a VC fund is typically the one running the show, doing the day to day management of the fund. The General Partner is a team or a company in and of itself. The General Partner may also be referred to as Managing Partner, Partner, or Venture Partner. Know this term because the General Partner is the one who will review you and your company and manage the process of determining whether you can pitch to the fund and how you move through their system.
For more terms and their definitions, check out the Activist VC Glossary over at Nexit Ventures.
Walk the Walk: The Process of Securing Venture Capital
You’ve assessed yourself and your company. You’ve learned enough of the lexicon to have an informed conversation with a VC fund. Time to step up and do this thing! There are two areas of activity to keep in mind here: Process and People.
Every reputable VC fund has an established process for approaching it, applying for funds, awarding funds, and dispersing funds. If that application and process are not on the VC fund’s website, contact the fund directly and ask for the information. It is imperative that you not only know, but respect the process that the fund has laid out.
Yeah, yeah, I get it. You’re an outside-the-box entrepreneur. They should make an exception! Stop it. You want their money? Their involvement? Respect their process.
The people putting money into that fund are trusting that the Managing Partner is adhering to the rules and processes that every partner has deemed best for the pursuit of making money. They are not in the fund for you and your exceptions. They’re in it to make money.
VC funds are making bets on companies every day. They hedge those bets by establishing a process that vets entrepreneurs and their business ideas. Be ready, willing, and able to go through that process. There’s a ton of paperwork, meetings, presentations, homework, and waiting time. You’ll be asked questions that seem irrelevant but, to that funder, are not. You’ll feel your company is going in naked, sharing the level of financial information some of these firms require. Remind yourself often that you are encountering this because a fund is seriously considering gambling on YOU. It’s understandable that they want information and answers up front.
Speaking of “the people putting money into that fund,” shine up your networking shoes, friend, because getting VC money all but requires a warm introduction to someone at the fund. Remember that the partners in that fund are gambling with their money. They are much more open to hearing ideas via a trusted party than Joe Schmo off the street.
Don’t despair if you have no easy or instant connection in place right now. Take the time to seek out relationships, ask around, go to events and glad-hand. You are in this for the long haul, right? Research the partners in the funds you’re targeting. Each is an individual, with individual interests. Try to find one or two members with whom you have a connection or something in common.
While you’re researching the partners, try to find someone at the fund who has an interest in your field. For instance, if you’re starting a bottled water company, who has sat on the board of a beverage company already? If you’re in tech, who has shown a fondness for gadgets by going to tech events or sharing products on social media? A VC fund partner who is interested in your niche can offer funding, along with some sage wisdom.
Your Holy Grail: Term Sheet
The holy grail you are working toward is called a term sheet. This document will outline what the fund is offering, and what it expects from you in return. When you get it, go ahead and happy dance all over your apartment. (Close the blinds first. You have a reputation to maintain.) When you’re finished dancing:
- Read the term sheet carefully. Do not gloss over words you don’t know, requirements that seem odd or impossible, etc.
- Get your attorney to review it. This is not the time for a cursory inspection. Have your attorney provide a thorough read, review, and guidance for your next step.
- You will likely be asked for even more information about yourself, your team, or your company in the term sheet. If you aren’t clear on what they want, ask for details. If you cannot provide what they want, explain why and ask if something else could suffice. Do not ignore a request for information.
Get More Venture Capital
Once you have venture capital in hand, your job is not done. It’s showtime! Outperform whatever you promised to the VC fund. Performance now will help determine whether you’re a good bet for additional funding in future rounds.
Performing well is not enough, though. Be sure you communicate your successes and experience back to the VC fund. Keep them involved by providing updates along the way. This can have the added benefit of spurring a member of the fund to offer you wisdom, advice, guidance, counsel, connections, or ideas that benefit the company in ways you wouldn’t have thought or known.
Get To It
By assessing yourself and your company, learning the lingo, making connections, and meeting the requirements of the fund within its stated process, you will be well-positioned to find and secure venture capital funding. And, when you do, we want to know about it! Who knows? You may be our next startup success interview on the Foundr podcast.