Understanding Venture Capital Funds
Venture capital is one of many ways entrepreneurs can obtain funding for their business ideas; among one of the most popular, in fact. Venture capitalists can be found anywhere, especially in the fastest-growing cities for entrepreneurs today.
How does venture capital work? What do you need to know before seeking funding? Here, entrepreneurs, venture capitalists, and business leaders share advice for navigating the world of venture capital.
Angel Investments versus Venture Capital
Angel investments are, in a lot of cases, the first money a start-up raises. When you raise a seed, or a Series A round, instead of raising it from venture capitalists or institutional sources of capital, you often raise it from individuals.
There are two categories of individuals. There’s the people you know, like friends, your grandmother, and brother in law’s next-door neighbor. That category is called friends, families, and fools. That’s often lumped into the same category of angel investors. They’re people who like to make early-stage investments in young companies. They typically take somewhere between a very passive role in the company where they give $25,000. Or they might take an active role where they sit on the board and be an advisor, typically with the financing of $100,000 to a million dollars. Once you start raising bigger amounts of money than that, you typically need to go to a traditional institutional source of financing, in which venture capital is a natural one. Not the only one, but a natural one.
-Brad Feld, Foundry Group
Solve an Industry Problem
Venture Capital is what most entrepreneurs think they need when they start a business. However, the core of what they really need is a killer product, calculated distribution, timing, great customer service, and capital (preferably from customers over outside sources). The most important thing an entrepreneur can do is solve a big problem in an industry. Everything else will happen automatically.
-Ron Babich, Crush IoT
Know Your Business
Venture capital is one of the fastest-growing methods of funding for cities as they expand. For small businesses or startups, it’s important that they are organized and prepared to answer questions. They need to know their business plan, their product or service, solutions to potential problems, and a reason why they will be successful in their local area.
-Carey Wilbur, Charter Capital
Universities are a Network
I’ve learned that there’s a widespread network that seemingly stems right from the steps of the university where you may have graduated from. At the center of the network is the university itself, with school administrators, professors, and donors. But diving deeper into the network there are alums, friends of alums, and rich uncles and aunts of alums. I like to say that if you’re connected to a university, there’s a way to raise capital, recruit a key hire, or receiving a critical introduction. It’s just a matter of tapping into the network and “bearing down.”
-Brett Farmiloe, Markitors
Perfect Your Pitch
Venture capital typically works the same everywhere: investors see potential in a startup or small business and finance them. Small cities with universities have the potential to see large growth in technology and small business, which makes it an appealing location for venture capitalists to seek opportunities. For entrepreneurs looking to secure funding, make sure you have a solid pitch with a plan for the future. Investors want to know what’s in it for them, so give them a reason to invest in you.
-Denise Gredler, Best Companies Arizona
Technology is a Popular Startup
Seeking funding and pitching your company is an exciting and nerve-wracking time! If your company creates software, technology is becoming an increasingly popular area for startups and has a growing number of investors that are interested in the sector. When you’re first starting out, network and attend as many events as you can, share information about what you do, and ask for introductions to investors you’d like to meet. You never know when you’ll meet the right person!
-Zack McCarty, Qwick
Finance From Outside of Your City or State
An uncommon tip here would be to look outside of your economy. There are certainly local venture capitalists and wealthy individuals who can contribute capital to your efforts, and this recycles money through the local economy. Instead, find funding from outside of your city or state, which can help bring new money in.
-Michael Alexis, TeamBuilding
Seek Local Assistance
Entrepreneurs have several opportunities when fundraising. Venture capital firms are keen to support the local startup ecosystem and are an easily accessible email away. Additionally, there is an increasing number of location-agnostic venture capital firms and remote startup accelerators, which increases access to startup support and funding to companies in growing startup hubs.
-Arooj Sheikh, NewChip
Use Data to Stay Ahead of Your Competition
Entrepreneurs should ensure they constantly monitor their key performance indicators, which will prevent them from falling behind the competition. It is important to recognize the metrics that actually apply to the matter at hand; data for the sake of having data is a pointless endeavor.
Having a bulletproof business plan and a simple yet effective pitch deck will help them communicate clearly with investors. Investors need to see that the founders believe in their startup and that they have a mission/vision that they are passionate about achieving. Above all else, you have to show investors why you are a smart investment, how you, as an entrepreneur, create value, and what separates you from the rest of the pack.
-Gavan Singh, ConexUp
One thing that entrepreneurs should know is that venture capital investors are drawn to speed. The fastest company in any market will win and it will be a decisive victory at that. Speed is an asset and if technologies employ it wisely, then those startups will be a magnet for capital.
-Ruminder Dhillon, Arizona Founders Fund
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.