Startup companies in fast-growing fields often need significant cash infusions to get their businesses off the ground. Only startups with a significant potential for growth and high projections for revenue are candidates for venture capital funding.
Startups rely on venture capital funding to underwrite the cost of developing products, hiring qualified executives, and acquiring equipment and space to do business. Without venture capital funding, many startups would be left to their own devices and have difficulty ramping up their businesses.
Suraj Rajwani is the CEO of DoubleRock, venture capital, and private equity firm. He explains why venture capital is important for startups and how emerging companies can attract investors’ attention.
What is venture capital and how does it work?
Venture capital is private equity funding provided by large institutional investors and individuals with a high net worth. Investment banks, financial institutions, and well-heeled investors are the most likely to offer venture capital funding.
Venture capitalists take on a significant level of financial risk when they fund startup companies. For the most part, venture capital funding goes to established companies growing and expanding their operations.
Since venture capitalists shoulder so much risk when they fund a new company, they require that the company give them partial equity and a decision-making position. This can discourage some startups from acquiring venture capital funding.
As a specialized area within private equity funding, venture capital focuses on companies seeking large amounts of money for the first time. Private equity funding tends to focus on larger and more established companies that want equity. In addition, company founders are given a chance to sell some of their ownership stakes and profit.
Venture capitalists invested $150 billion in startup companies in 2020 alone. This amount represents a relatively small segment of the entire venture capital industry. Most of the money available from venture capitalists goes to established firms.
How to attract venture capital funding
Startup companies may be confused about how to go about obtaining venture capital for their enterprises. The following points should help startups plan their operations and pitch deck to show venture capital companies that they are worthy of a large investment.
1. Work on your own financial health
Venture capitalists will want to know how you handle your personal and company finances before they leap funding your enterprise. They want to see that you can act responsibly with your own personal money and that of the company. If you have an excessive debt load, poor credit score, or few liquid assets, venture capitalists may assume that you will also poorly handle your company’s finances.
Become financially literate. This will help venture capitalists understand that they will get a return on their investment, and you will be able to have productive conversations with them.
2. Help venture capitalists understand your company’s story
It helps to think of an interview with a venture capital firm or individual investor as a job interview. The venture capitalist will learn how your business developed and how you formulated your central idea. Having a strong story means that venture capitalists will be more engaged with your company.
In addition to telling the story of how your company started, you should also consider revealing your exit strategy. Generally, when venture capital funding rounds have been completed, the principals exit the company and take their profits along with them.
3. Conduct research on venture capital firms
Before you pitch your new company to a venture capital firm, you will want to make sure that they accept the type of business you are running. Only a venture capitalist who understands your business segment should be considered.
Know what size of investment these venture capital firms tend to make, and ensure that their average award level is compatible with your goals. It would be unfortunate to attract the attention of a venture capital firm that doesn’t have enough money to fund your enterprise fully.
It is a good idea to choose a venture capital firm that is geographically close to you. This means that you will be able to ask for more in-person assistance.
4. Engage with potential investors
Finally, Suraj Rajwani recommends that you engage with venture capital firms both online and in person. Social media can be an invaluable source of assistance when encouraging venture capital firms to do business with your company.
Venture capital and emerging businesses
When your company takes advantage of venture capital funding, you could fuel your startup’s rapid growth and expansion. You will hire the right employees, acquire the necessary equipment, and engage in research and development.
Suraj Kumar Rajwani encourages startup companies with a large growth potential to look into venture capital funding. Without searching for this funding and engaging with venture capitalists, funding opportunities may pass by.
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