Updated: September 30, 2021
Growing a business requires proper financing. If your start-up has considerable growth potential but needs financial assistance to move forward, it may be time to look into venture capital (VC) funding.
Venture capital firms invest in start-ups and other early-stage companies with high growth potential in exchange for equity in the business. VC funds, which pool investments from institutional and private investors, are controlled by a small group of individuals who seek opportunities with significant payoff potential.
Securing VC funding is an arduous, time-consuming task that can take company founders time away from other important matters. Therefore, it is best not to seek out VC funding until you are in a position to be successful. Most VC firms will want to see that you have a strong management team in place, a viable product or service and a strong or growing customer base before investing in your company. Some VC firms specialize in later-stage funding, helping established companies take their business to the next level.
Assemble a solid pitch deck (a presentation that provides an overview of your business model, market opportunity, management team, financials and the amount of funding you need) and seek VC firms whose interests align with your company. VC firms typically focus on specific industry sectors (like tech, medicine, etc.), company stages and/or geographic regions.
When VC firms are serious about investing, they will present you with a term sheet. Though not binding, this will provide a blueprint of what to expect from your relationship with the firm. The term sheet will lay out the details of the firm’s financial investment and what the investors will seek in return from your company. The corporate governance section will outline how operational power will be distributed among the founders and investors. The term sheet will also address how the investors’ interests will be impacted if the company is liquidated, dissolved or sold.
The VC firm’s investment will be predicated on your company’s valuation. The valuation is an estimate of the company’s current worth and is based on many factors, including intangibles. Ultimately, the valuation will be negotiable and agreed upon by both parties. From an entrepreneur’s perspective, the higher the valuation the better.
The type of VC investment varies based on the stage of your business, and VC firms may specialize in one or more types of funding.
The experience and past success of the management team is a crucial factor not only in attracting VC funding but in the calculation of your business’ valuation. The leadership team should include individuals with impressive resumes, start-up experience and diverse skill sets that have a shared strategic vision for the future success of the business.
VC firms will do due diligence to further evaluate the potential risks and rewards associated with investing in your business. The due diligence time frame can range from a week to several months, in which the VC firm will take a deep dive to evaluate your team, market, product, traction, financials and legal issues, among other factors. VC firms may consider such questions as whether the founder is a good fit for the market or whether the product is differentiated enough from the competition. Prepare in advance for due diligence by assembling the documents that VC firms typically request, including financial statements, financial projections, revenue breakdowns, organization charts, active contracts, intellectual property registrations, business plan, market and competitive analyses, and a breakdown of how you plan to use the funds, among other documents.
VC deals are complex, and consulting with an experienced VC attorney is crucial to protecting your interests. Contact the experienced corporate law attorneys at Romano Law today.