What You Need to Know about Venture Capital
An entrepreneur in a suit adjusting his tie
If you need funding for your new business, look beyond your local bank to get the capital you need. Most banks and traditional lenders won’t lend money to businesses without an operating history, and new businesses and startups often have more success seeking funding through alternative methods, such as crowdfunding, angel investors or venture capital.
Venture capital is a type of financing provided to businesses in exchange for equity, or ownership, in the company. Many venture capitalists are also given the power to make important decisions, and they use their expertise to nurture the company and guide it toward success. Their ultimate goal is to make money through investing in the company, and so they will often provide mentorship through the early growth stage and then exit once the company is acquired by a new owner or starts selling its shares to the public (initial public offering or IPO).
Since new businesses and startups are risky, venture capital firms prefer investing in companies with a proven concept and high-growth potential, such as companies using innovative technology. Uber, Airbnb, and Facebook have all received venture capital funding, as well as the skincare company Doctor's Dermatologic Formula and craft beer company Bira 91.
Venture capital firms are more likely to invest in a company that is through the early startup phase and has begun developing its product or service. Angel investors, however, often provide startup funding to a new company, as long as it’s one they have a personal interest in.
How to Find a Venture Capital Firm for Your Business
Once you have determined how much money you need, use these tips to help find the right venture capital firm that will help your business grow:
- Get a referral.
Venture capitalists receive too many solicitations and business plans to keep up with all of them, so a warm introduction from someone you both trust will increase your chances of getting funded. Ask your CPA, lawyer, alumni contacts, business association contacts or other professionals in your network for a referral.
Other ways to find a venture capital firm include attending industry events and investor conferences, or through a local venture capital association. Cold calling venture capitalists is also an option, but it should be treated as a last resort.
- Be prepared.
Before meeting with an investor, complete your business plan and be ready to talk about your business model, your position in your market and your management team.
- Give a brief yet compelling pitch of your business.
Some investors hear hundreds of pitches a year, so you need to get their attention and interest in just a few minutes. If you can come up with an intriguing tagline that explains your business in just a few words, even better.
- Connect personally.
Try to connect with your potential investor personally and communicate the passion you have for your project. Venture capitalists prefer investing in a company when they have evidence that the founders themselves are personally invested.
- Be selective.
Aim to find someone who has experience in your industry and will bring valuable advice and mentorship, not just money. If you’re a first-time entrepreneur, you will need the guidance that an experienced investor will bring.
- Be patient.
It may take several months of shopping your business plan around before you find someone who is a good fit for your company. Be willing to change your pitch and your approach over time if you’re having trouble finding someone who is willing to invest.
Now that you understand the benefits and the process, consider using venture capital to finance your business. Before meeting with a potential investor, be sure to complete section 4 of MOBI’s business plan template, “Financing.” For more help with getting your business off the ground, sign up for MOBI’s Starting a Business course.