As an entrepreneur, you want to be well-informed about all the potential sources of funding for your business. Venture capital just happens to be one of the potentially most lucrative ways to finance a startup or small business.

Here’s what you need to know about it.

How Does Venture Capital Work?

Venture capital firms will raise money from individual investors. They are called limited partners. The firm will then use these funds to invest in a startup. These investments typically involve high interests.

The aim is for the startup to go public or get acquired by a larger company. It can then easily pay back both the investment and the interest.

Venture capitalists are usually experienced investors who have more than one investment under their belt. They have experience and plenty of industry knowledge, so they can also provide guidance and valuable advice.

A lot of venture capital firms look for very specific startups to invest in, whether based on personal interests and experiences or the highest likelihood of success.

Types of Venture Capital

There are three types of venture capital you need to know about:

  • Pre-seed funding: the earliest stage of developing a business, when the founder tries to bring an idea to life.
  • Seed funding: the point at which the business is looking to launch its product or service.
  • Early-stage funding: the point after the startup has already launched its product or service and is looking for funding to expand or grow. There can be several rounds of funding, known as Series A, Series B, and so on.

Depending on where you are in the business development stage, you can tailor your approach to raising the funds you need.

Pros and Cons of Venture Capital

Venture capital can help your business grow faster, but it does come with some risks and potential drawbacks. Here are the pros and cons you should weigh before you decide to seek out this type of funding:

Pros of venture capital

  • It provides the much-needed capital to bootstrap your operations.
  • You don’t need any cash flow or assets in order to secure VC funding, so it’s accessible to practically everyone, as long as you have a sound business idea.
  • You get access to mentoring and networking via the VC firm, so you can hire the right people and avoid making common mistakes.

Cons of venture capital

  • A large share of your company’s equity will belong to someone else.
  • You may lose creative and partly executive control over your business.
  • You may be pressured for an exit, as opposed to being allowed to grow your business over the long term.

How to Secure Venture Capital Funding

In order to secure venture capital funding, you will need to tick several boxes. The better prepared you are, the higher the chances of landing the best investment, from the best experts.

Be Prepared

One of the best ways to attract funding is to be prepared for it. Even in the earliest stages of your business, you can do a lot to minimize potential risk.

Do as much research and preparation as possible to ensure product-market fit. Analyze your target audience and understand their needs and concerns. Validate your business idea in as many ways as possible.

Have a clear funding plan and budget. If your investors understand exactly how much money you need and where you will spend it, they will be more likely to consider you. Understand exactly how much money you need to become profitable and how long that will take. This will be the surest signal that you understand the market and the niche and that you’ve prepared accordingly.

Get to Know More about Venture Capitalists

In order to attract the right investors, you will need to find and get to know them first. Spend some time online and learn as much about these people and their firms as possible.

Follow VCs on LinkedIn and see what makes them tick. What kinds of businesses do they invest in? Are they looking for a quick and lucrative exit, or do they have the patience to watch you nurture an idea? How can you get their attention?

Compile a list of people you would actually want to work with. You don’t want to accept an investment from the wrong individuals, as it may end up costing you the future you were hoping to build.

Prepare a unique and tailored approach. Most VCs will tell you exactly what they want to see from you, and how you should send you pitch in. Make sure to follow their instructions precisely, and don’t bug them if they don’t get back to you immediately.

Perfect Your Pitch

Venture capitalists get dozens or hundreds of pitches a day. They don’t have the patience or the time to go through all of them.

In order to get noticed, you will need to compile an investor deck that will communicate your message in less than a minute.

Explain the problem and your proposed solution clearly. Provide as much detail about the market as you can. Validate your idea and be clear about the potential for the investor.

Make sure you’re ready for in-person pitching as well. Investors will want to gauge what kind of entrepreneur you are and whether you have what it takes to make the idea a success. Anyone can have a great business plan. Seeing it through is where most businesses fail.

Have a clear answer to all the most likely questions. Learn all facts and figures by heart. Most importantly, be yourself. Don’t try to please the money people. Do what is best for your business.

Wrapping Up

Now that you understand what venture capital is and how it can benefit your business, consider whether it’s the right way of financing for your specific case. Don’t rush into it, and don’t expect your investors to have your back or care about your company as much as you do. They are in it for a return, not for the passion.