Understanding Venture Capitalism and How to Secure Funding Through It

venture capital

You may have heard the term “venture capital” before, but you might not be one hundred percent clear on what it means. It’s an investment method that can help you if you’re trying to get a startup off the ground. You may also use it if your company already exists, but you’re trying to expand and take things to the next level.

We’ll take a few moments to explain how venture capitalism works, as well as how you can attract the attention of venture capitalists who might have an interest in funding your project.

Venture Capitalism Basics

Let’s imagine that you have a startup idea. Maybe you have some proprietary patient management software that you’re trying to mass-produce and market. This is a likely scenario, since this software is flooding the market these days, and many companies and individuals are trying to get in on the trend.

With venture capitalism:

  • You come up with a coherent business plan
  • You approach a venture capital firm
  • You try to sell them on the idea

It sounds relatively simple, but there’s considerably more to it than that.

Who Works at a Venture Capital Firm?

A venture capital firm might consist of:

  • Analysts who just graduated from college or are current MBA students
  • Junior or senior associates with financial backgrounds
  • Principals who are close to making partner
  • Partners who raise the firm’s capital

Venture partners are also part of the firm, but they don’t have anything to do with the day-to-day operation. Their job is to bring in new deal flow, or potential investments at which the firm can look. Their payment is “carry interest,” or a percentage of the investment returns.

There is also often an EIR or an entrepreneur in residence. This individual works within the firm, helping it determine what ideas are viable. The EIR’s eventual goal is usually to launch their own startup at some point.

Getting Ready to Approach a Venture Capital Firm

With your idea, the first thing you need to do is study the market in which you want to make an impact. Then, you’ll come up with a business plan. It’s similar to what you’d do if you were going to approach a bank or credit union for a loan.

You’ll then work on your elevator pitch or brief synopsis of your product and why the market needs it.

Identify the Right Firm to Approach

Next, you can look at different firms to see which one might be the right fit for your project. You can use tools like Crunchbase, Venture Deal, CB Insights, or Mattermark. They’ll have detailed information regarding the products and startups in which firms have shown interest.

You’ll then look at who’s close to you geographically because probably at some point, you’ll need to go there in-person to market your startup or product. However, with the pandemic, you might be able to do it via Zoom or a similar platform.

Who You Might Approach with Your Idea

Generally, the individual who you might approach with your startup concept would be the EIR, the entrepreneur in residence. If they feel like you have a viable idea, they’ll kick it upstairs to one of the VCs.

At this juncture, you’ll have a pitch deck, which is like an idea presentation. The wheels are now in motion. If the idea goes through the proper channels and everyone likes what they see, then you’ll hear back from them, and they’ll let you know.

Presenting to All the Partners

You’ll get an invitation to present to all the partners at this point. If there weren’t a pandemic, then you’d be in a room with all partners so that they could ask you any questions they have face-to-face. Again, because of Covid-19 concerns, you might do this step online, at least until a vaccine emerges.

Hopefully, the first partner who you approached will have nice things to say about you. Part of this process is trying to establish a rapport with the first partner you meet because then they’ll be on your side during this final crucial stage.

If you impress all the partners, then they’ll probably sign off on supporting you and funding your idea. They’ll give you what’s called a term sheet, and then the firm will do further due diligence to spot any glaring red flags.

If there aren’t any, then you’ll get your funds, usually with three months or so. Now, you’re free to start work on your project.

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