It’s no secret that a startup’s success is often correlated with how much capital to which it has access. A CB Insights study of more than 1,000 startups in the seed stage found that less than half, or 48%, managed to raise another round of funding.
To help entrepreneurs, both new and experienced, here are tips for how to approach raising VC money.
VC Fund Research
Almost all venture capital firms have particular areas of focus. They may invest exclusively in AI, social entrepreneurship, fintech, green technologies or any other number of categories. VC firms also may only invest in designated geographical locations. For example, 4490 Ventures mainly invests in early-stage startups in the Upper Midwest.
Make sure you do your research before initiating contact with a VC. You wouldn’t want to reach out to a fund focused on B2B SaaS if you’re building a consumer product (this does actually happen quite often).
Also, VCs usually focus on a specific stage of investment. For reference, seed funding is the first equity funding stage and typically represents the first outside capital that a business raises. One of the most common types of investors participating in seed funding is the “angel investor” who is an individual investing in startups at the earliest stages.
The subsequent stages–Series A, B, C and so forth–represent subsequent rounds of capital raised by a startup. Here is a brief description of the first three:
- Series A: This is traditionally seen as the first official round of funding and is often generally larger than seed funding. This investment aims to help startups further develop their business model, begin scaling their product or service and expand the team.
- Series B: This round can help startups take their business past the development stage by expanding market reach and helping them grow to meet demand. To raise a Series B, startups need to have demonstrated an ability to scale in their core market and begin exploring adjacent markets.
- Series C: At this point, the focus is on scaling a company with an already proven track record. After this stage, companies often contemplate exiting or raising from traditional sources of growth capital.
Approaching a VC
As you can imagine, venture capitalists are inundated with unsolicited calls and emails on a regular basis. See if you have any connections to members of the firm that can make a warm introduction for you. If you don’t have any common connections, provide context for why you want to meet specifically with them and leave out phrases like, “I’d like to grab some time on your calendar” or “hoping we can connect.”
Approaching a VC involves due diligence. By researching investments that the VC firm has made that are relevant to your opportunity, you show the VC that you’re serious and thoughtful. Successful fundraising isn’t always a game of quantity over quality — rather, it’s about being smart about whom you reach out to, understanding and articulating why you’re reaching out to them specifically, demonstrating how you align to the areas of investment focus and having the appropriate follow-through.
Email is typically the best way to cold contact VC firms because their job often requires travel. Still, make sure to leave all of your contact information so that they can reach you on the medium of their preference.
Before the Initial Meeting
Don’t leave it up to the VC firm to research your startup. Prior to the meeting, send a brief, concise overview of their investment opportunity. This establishes a foundation for your initial conversation and will likely lead to a more productive meeting. Respond promptly to any questions or requests for materials.
It is important to know that funds likely won’t sign an NDA for an initial meeting, so plan ahead on what information you are willing to discuss. At the same time, keep in mind that VCs aren’t trying to have you reveal your entire IP in this meeting.
During the Initial Meeting
The first meeting should not simply be a presentation, it also should be an engaging conversation. At this point, you should have your problem statement and revenue model nailed down. Focus more on those topics than the technical aspects, which can be discussed later if the VC firm decides to move forward. This meeting is about focusing on the big picture and highlighting a few key numbers that support your business idea.
It is important to remember that this isn’t a one-way interview. You are interviewing the firm, too, to make sure it’s the right fit for your business. Prepare some of your own questions for the fund, both about them in general and about the relationship they would foster with you.
Subsequent Meetings
It would be naïve to expect a VC firm to write a check after the first meeting. The process requires multiple steps and a thorough vetting period. Venture capitalists want to get to know you as much as your business to ensure that they feel good about investing and the relationship you will have. You should plan at least six months minimum to open and close a funding round.
VCs meet with hundreds of startups each year to make a very small number of investments. Having the right approach and getting in front of the right funds is key to successfully raising venture capital funding.
