If you’re interested in securing financing from venture capital firms to get your business off the ground, you might be wondering what to expect and for that matter, what you need to do and when. Read on for a step by step guide to getting funded by a venture capitalist.
Create Deliverables And Get Your Pitch Ready
You’re going to need to come up with a business plan, paying particular attention to the operations plan section since this will explain both the risk represented by an investment in your business and your strategy for mitigating these risks. The executive summary of your business plan is also a vital part of your deliverables, since this is the first section that potential investors will read and it encapsulates all of the most important points of your business plan.
You’ll also need to refine your elevator pitch, a high concept pitch, teaser email and possibly a slideshow presentation as well. The better your supporting materials, the better your chances will be of securing the financing you need.
2. Create A List Of Venture Capital Firms To Make Your Pitch To
It may be best to pay for a database of private equity firms and use criteria like the stage of your company’s growth, your industry and your location to narrow down your search to the firms which are the most likely to be interested in funding your business. Do some research on the websites of the venture capital firms which meet these criteria to make sure that they’re currently investing in your industry. Having a narrowly targeted list allows you to focus your energy on the firms which are the best prospects for funding.
Contact The Venture Capital Firms On Your List
The next step is to figure out who to get in touch with at the venture capital firms on your list. Managing partners are the people who give the final thumbs up or down, but they tend to be too busy to read every business plan that comes their way. An associate partner tends to have more time to read unsolicited proposals and plans, but don’t have as much power as a managing partner. Then there are venture partners; these individuals help manage the companies in the firm’s portfolio, but have the least clout. The higher up you can go with your proposal, the better, but when you send out teaser emails, you should focus on the connections you already have.
4. Meet With Venture Capitalists And Provide Due Diligence Materials
Once you secure a meeting, deliver your presentation and answer the questions that venture capitalists will be the most interested in how much funding does your company need, what is the worth of your company and what is your exit strategy? Try to get a yes or no answer as to whether the firm is interested in your business and provide them with the necessary due diligence materials: management and company background, financial projections, your business plan, employment agreements, letters of intent, purchase and sale agreements and any other relevant documentation.
5. Negotiate The Terms Of Funding
If you want to negotiate from a position of strength, approach several different potential investors at the same time; when you create competition, you’ll be in a much stronger position to get what you want. When you get to the point of negotiating terms, pay attention to liquidation preferences. If at all possible, try to negotiate a 1X liquidation preference this is a guarantee that the venture capital firm will recover their investment when your company reaches a liquidation event. This differs from a 2X or 3X liquidation preference, which means that your investors will receive two or three times their investment before you see a dime from an IPO or buyout. Another thing to watch out for is participating preferred liquidation preference. This gives investors not just a 1,2 or 3X liquidation preference before you see any proceeds but also a percentage share.