DEBT FINANCING
Process Of Venture Capital
Building a startup from scratch is an expensive process, and most startups find themselves in need of extra resources at some point in the journey.
The vast majority of these startups turn to investors to provide the capital they need to continue funding their company. There are many different types of investors, such as venture capitalists (VCs — also known as venture capital firms) and angel investors. There are different advantages and disadvantages for different types of investors, and some types of investors are only willing to invest in certain types of startups.
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VENTURE CAPITAL
Process of Venture Capital Funding
One of the most important decisions in the process of venture capital funding is deciding when to seek funding. Each startup’s funding journey goes a bit differently because every startup is unique. For example, different startups may have very different required budgets or access to different resources, to begin with. Some types of products are much less expensive to create than others and some businesses may be able to bootstrap (self-fund) their way for a while. Different business strategies may also have very different timelines that require investments at separate points in the journey.
VC Funding journey
Here are a few of the different funding scenarios a tech startup might find itself in that would influence when the startup starts looking for venture funding:
- The startup has an idea for a product but needs funding to actually build the product. Most companies are able to bootstrap at least a little bit early on, but if your product idea is very expensive, you may need some venture capital up front just to get it off the ground.
- The startup has a product that’s ready but needs funding to bring it to market. Maybe your product is already complete, but you need some financial help actually executing the business plan to market and sell it to customers.
- The startup is already underway selling products but needs additional funding to expand further. In the third scenario, your startup could already be successful on a small scale, but you’ve taken it as far as you can out of your own pocket and you need an investment to scale effectively and continue to grow the company.
With the rest of this article, we’ll take a deeper look at the process of raising venture capital for a startup, including the steps involved, how venture capital firms decide which startups to fund, the difference between venture capital vs. private equity, and more.
Stages Of Venture Capital
Each business’s venture capital journey looks a little bit different. The exact process depends on many factors such as the industry your startup exists within and the type of product you’re creating. However, the journey is typically broken down into several stages. These are the stages of venture capital:
Pre-seed
The pre-seed stage is technically not a funding stage, but the very first stage that founders must complete before they can access venture capital. This stage is when founders are doing the early work to create a prototype or validate the business idea in some other way. It’s common for founders to bootstrap throughout the pre-seed stage or rely on support from family or friends because most VCs aren’t willing to invest yet at the pre-seed stage.
Seed
The seed stage is the first round of fundraising. Once you actually have a way to show venture capital firms that your idea for a company is viable, you can convince them to invest in growth-stage venture capital to be used for market research or product development. Seed-stage investors are usually looking for exponential growth potential from the startups in which they invest.
Series A
The series A stage is an early venture capital stage when it’s time to start proving that your company is generating revenue. Series A investors generally want to see that your startup’s customer base is growing and that your plan for long-term profit is on track. The series A stage is about building momentum for the company and demonstrating that it can generate long-term returns.
Series B
Series B funding usually goes to startups that are somewhat established. VCs who provide series B funding typically want their money to fund expansions that will create additional revenue. For example, venture capitalists might provide series C funding to startups that are ready to expand into new markets, or need to create additional teams like a marketing team or customer service team to support a growing customer base.
Series C+
Series C funding and beyond help well-established companies grow even further — for example, a nationally successful startup might use series C funding to expand globally. Companies seeking series C funding or later usually have steady customer bases and strong, reliable streams of revenue. VCs are often more willing to invest at this stage because a series C investment is considerably less risky than a seed stage or series A investment.
After completing a series C funding stage and possibly beyond, the next step for s startup would be an exit. Exiting is when a startup makes an initial public offering (IPO) and begins selling shares on the public stock market.
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Features Of Venture Capital
Venture capital is a type of financing that investors provide to startups to help them grow. There are many different types of investments — one of the features of venture capital is that it is a type of private equity investment. A private equity investment is an investment that exchanges funding for a percentage of ownership in the company. Many startups give up a small portion of their equity to venture capital firms, and in return, venture capital firms provide the company with financial resources. Venture capital firms are one of the most common sources of venture capital.
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Venture Capital Firms
Venture capital firms are not the only way for startup founders to raise money from investors. There are other types of investors as well that founders can approach for funding. One of the most common kinds of investors besides venture capital firms is angel investors. So what’s the difference between a venture capitalist vs. angel investor?
Venture capital firms
Venture capital firms are firms that fund startups with high growth potential. VC firms typically take a share of ownership in return for their investment.
Angel investors
Angel investors are individuals who fund startups with their own money. Angel investors usually receive equity in exchange for their investment. One of the benefits of angel investors is that they are sometimes willing to make riskier investments than VC firms.
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Venture Capital Advantages And Disadvantages
Many startups accept investments of venture capital at one or more points in their lifespans. Venture capital is a useful way for companies to gain the resources they need to grow, but that does not mean there are no venture capital disadvantages. Let’s compare a few of the most important venture capital advantages and disadvantages.
Advantages
- Resources – Obviously, the primary advantage of venture capital funding is the financial resources it provides. Venture capital firms can provide some of the largest investments, of any type of investor.
- Expertise – Some venture capital firms provide more than just money. A founders studio like Golden Section can provide guidance and expertise as well as financial investment.
- Networking – Networking is another reason that raising venture capital can be a good idea. Making connections with investors can help you expand your network and get in touch with other potential investors or valuable business partnerships.
Disadvantages
- A smaller share of control – The primary disadvantage of securing venture capital as a means of funding your startup is that it typically requires you to give up some control of your company. Exactly how much control depends on the specific deal. In some cases, it may be just a small portion, and in other cases, a VC might take a controlling share in exchange for their investment.
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Venture Capital In EntrepreneurshipÂ
There are quite a few reasons that a young startup might choose to raise venture capital. Here are a few examples of common reasons for raising venture capital in entrepreneurship:
Scalability
Even if you are able to bootstrap your way to success, a competitor who is better funded could still beat you to market. Sometimes, you need growth to happen now. It would be nice to wait and grow at a pace you can pay for by yourself, but venture capital can give your startup the boost it needs to remain competitive.
Credibility
An investment in venture capital is also great for your startup’s credibility. If a VC firm is willing to bet on your success with their money, it can signal to other stakeholders that your company is worth believing in.
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Methods Of Venture Capital Financing
Most startups consider various methods of venture capital financing at one point or another. Some companies may use venture capital for early development, others may use it to boost growth later on, and still, others may accept rounds of venture capital at numerous different times throughout the journey.
Even though venture capital firms typically take a percentage of equity, the financial investment (as well as the potential for additional expertise and business connections) is worth the tradeoff for many startups.
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Here’s what our partners are saying…
From our MVP in 2015 to demonstrated Product Market Fit to strategic support with our growth funding, the Golden Section team has been an indispensable partner and resource for System Surveyor.
Christopher Hugman
Founder & CEO, System Surveyor
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Founder, QMSC
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