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How to Raise Funding From Venture Capitalists

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Venture capitalists (VCs), unlike angel investors, are professional investors that invest other people's money. Similar to angel investors, their goal is to earn a solid return on this money. In fact, VCs are judged and compensated by the performance of their investments. As a result, they are extremely rigorous in their investment decision-making process.

Here's how VCs earn returns for their investors:

1. Finding high growth companies
2. Making investments in them at favorable terms
3. Guiding and nurturing them
4. Enacting a liquidity event. This typically occurs by selling the company or taking it public.

VCs swing for the fences and only invest in companies they think can give them a "10X" return or 10 times their money back. This is because even with all their relevant experience, the average venture capital firm will lose money on half the companies they invest in and only break even on a third.  Where VCs make their money is on the approximately 20% of companies they invest in that see explosive growth and provide remarkable returns of 10 times or more on their investment.

So, the first criteria when seeking venture capital is that you can offer the potential of a 10X return to them.

The second criterion is that is your company must have significant market potential of $50 million, $100 million or more. Now, you might think that if a venture capitalist invested $100K in your company and got back $1 million (a 10X return) that they would be happy. This is not the case. This is because venture capitalists like to be "hands on" on their investments and help the companies they fund (called "portfolio companies"). And since each partner in the venture capital firm can only nurture so many portfolio companies, they want to invest in fewer companies, each of which can provide not only a 10X return, but a check of $50 million or more when it reaches liquidity.

To summarize, when approaching venture capitalists, remember the 3 hurdles:

1. Their primary goal is to make significant money from investing in you
2. You need to show them how they can earn a 10X return
3. You need to show them how your company can eventually be valued at $50 million or more

Now, if you meet these criteria, you should be a good fit for venture capital. But, raising this type of funding it is virtually impossible if you don't know what you're doing and haven't done it before. So follow this plan:

1. Develop a list of VC firms.

Start by creating a list of venture capital firms.

2. Narrow your list.


Each venture capital firm invests based on particular characteristics (e.g., some only invest in software firms), so you need to make sure your list only includes VCs that are interested in your type of venture.

3. Make sure the VC is active.


Many VC firms that have websites aren't active. That is, they aren't making new investments. You don't want to waste your time contacting and talking with these firms.

4. Find the appropriate person to contact.


This is critical. Venture capital firms are comprised of individual partners and associates. If you contact the wrong one, you'll be dead in the water.

5. Send the VC partner or associate a "teaser" email.

You don't want to send the VC a full business plan or executive summary initially. Rather, you need to send them a "teaser" email to see if they are interested. You don't want to "over shop" your deal.

Once the VC "bites" on your teaser email, the next step is generally to send them your business plan. Following that you'll do an in-person presentation(s), receive and negotiate a term sheet, and then sign a formal agreement and receive your funding check.

The venture capital raising process is a lot of work, but once you receive their multi-million check with which you can dramatically grow your company, you'll agree it's worth the effort.

 

Suggested Resource: In Venture Capital Pitch Formula, you'll learn exactly how to find and contact venture capitalists, exactly what information to include in your presentations, and how to secure your financing. This video explains more.


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Blog Authors

Jay Turo

Dave Lavinsky