How To Get VC Funding

For 25+ years, Growthink has helped entrepreneurs and business owners raise venture capital for their companies. Over this time, we have helped pitch thousands of venture capitalists, hosted VC gatherings, and even had many VCs as clients.

Below you’ll learn everything you need to know about how to get venture capital funding for your company:

1. What is Venture Capital Funding?
2. What is a Venture Capitalist or Venture Capital Firm?
3. Criteria For Raising Venture Funding
4. How To Raise VC Funding Step-By-Step

 

What is Venture Capital Funding?

Venture capital, also abbreviated as “VC”, is a subset of private equity and refers to institutional investments in early-stage, high-potential growth companies.

Private equity firms invest in shares in privately-held companies, rather than publicly-traded stocks.

In this context, institutional means that venture capitalists are NOT investing their own money as angel investors do. Instead, they are investing money on behalf of institutions, such as pension funds and university endowments (as well as the collective funds of some very wealthy individuals).

 

What is a Venture Capitalist or VC Firm?

A venture capitalist is an individual who works at a venture capital firm and makes such investments.

Venture capitalists often provide value beyond the actual dollars they invest in your company. Venture capitalists often provide additional value via:

• Contacts that they have in their networks that can help your business
• Advice in running your business, based on deep experience in your industry and in successfully growing ventures
• Contacts to additional sources of capital

A VC firm is an investment company that regularly makes venture capital investments. VC firms raise money for their own funds from sources that primarily include pension funds, financial and insurance companies, endowments and foundations, individuals and families, and corporations. The size of the venture capital fund is the specific amount of money the venture capital firm has raised.

Many venture capitalist firms are made up of entrepreneurs who have launched and grown their own successful businesses. As such, they are often able to provide significant strategic guidance and connections that can help your business grow.

The VCs are then charged with finding high-growth, early-stage companies, making investments in them at favorable terms, guiding and nurturing them, and enacting a liquidity event (e.g., selling the company or having it complete an initial public offering). Because they are utilizing other people’s money, and are judged and compensated by the performance of their investments, venture capitalists are extremely rigorous in their investment decision-making process.

 

Criteria For Raising Venture Funding

Most venture capital firms invest between $1 million and $25 million in the companies they fund, and the amount they provide often reflects the size of their funds.

Here are the venture capital requirements to determine if your company is ready for venture capital funds:

1. You can offer the potential of a 10X return. VCs swing for the fences and only invest in companies they think can give them a “10X” return or 10 times their money back. This is because even with all their relevant experience, the average VC firm will lose money on half the companies they invest in and only break even on a third. Where VCs make their money is on the approximately 20% of companies they invest in that see explosive growth and provide remarkable returns of 10 times or more on their investment.
2. You must have a significant market potential of $50 million, $100 million or more. Now, you might think that if a venture capitalist invested $100K in your company and got back $1 million (a 10X return) they would be happy. This is not the case. This is because venture capitalists like to be “hands-on” with their investments and help the companies they fund (called “portfolio companies”). And since each partner in the VC firm can only nurture so many portfolio companies, they want to invest in fewer companies, each of which can provide not only a 10X return but a check of $50 million or more when it reaches liquidity.

Virtually all VC firms have specific criteria that guide them such as the amount of financing they give to a company, the stage at which they like to invest, the sectors they are interested in, and the geographic area in which they will invest. They may also have very strict criteria regarding scale, speed, and liquidity potential. They want to fund companies that can grow very quickly, achieve significant revenues, and be sold or go public for many times the company’s current valuation. Venture capital firms like to exit an investment within 5 to 7 years. As a result, VCs tend to fund technology companies that have scale, speed, and exit potential.

Now, if you meet these criteria, you should be a good fit for venture capital. But, raising this type of funding is virtually impossible if you don’t know what you’re doing and haven’t done it before. So, let’s discuss your plan of action.

 

How To Raise Venture Capital Funding Step-By-Step

Step 1. Develop and narrow a target list of VC firms.

If you talk to an experienced direct marketer, they will tell you that “The list is everything.” If you don’t have the right list, you are wasting your marketing dollars. The right list is ten times as important as whatever you put in the mailing envelope, or whatever offer you include in your outbound telemarketing script.

The same holds true for your list of prospective venture capital firms. That is if you are going after the wrong VCs, no matter how good your company is, you probably won’t get funding.

There are three steps to creating a killer VC list.

1. Develop a list of VC funds. You can do this either by purchasing a list or by going to the National Venture Capital Association website (which lists NVCA member organizations).
2. Narrow your list. Each venture capital firm invests based on particular characteristics (e.g., some only invest in software firms), so you need to make sure your list only includes VCs that are interested in your type of venture.

   When seeking a venture capital firm, there are seven key variables to consider:

   1. Location: Most venture capital firms only invest within 100 to 200 miles of their office(s). By investing close to home, the firms are able to more actively get involved with and add value to their portfolio companies.
   2. Sector preference: Many venture capital firms focus on specific sectors such as healthcare, information technology (IT), wireless technologies, etc. In most cases, even if you have a great company, if you fall outside of the VC’s sector preference, they’ll pass on the opportunity.
   3. Stage preference: VCs tend to focus on different stages of ventures. For instance, some VCs prefer early-stage ventures, for example, emerging companies with no revenues, where the risk is great, but so are the potential returns. Conversely, some VCs focus on providing capital to established companies to bridge capital gaps before they go public.
   4. Partners: Venture capital firms are composed of individual partners. These partners make investment decisions and typically take a seat on each portfolio company’s Board. (Note that companies that VCs fund are known as “portfolio companies.”) Partners tend to invest in what they know, so finding a VC partner that has past work experience in your industry is very helpful. This relevant experience allows them to more fully understand your venture’s value proposition and gives them confidence that they can add value, thus encouraging them to invest.
   5. Portfolio: Just as you should seek venture capital firms whose partners have experience in your industry, the ideal venture capital firm has portfolio companies in your field as well. In fact, a VC may ask the management teams of their portfolio companies about your venture since these individuals are industry experts. In addition, if your venture has potential synergies with a portfolio company, this may significantly enhance the VC’s interest in your firm.
   6. Assets: Most companies seeking venture capital for the first time will require subsequent rounds of capital. As such, it is helpful if the VC has “deep pockets,” that is, enough cash to participate in follow-on rounds. This will save the company significant time and effort in raising future funds.
   7. Fit: As mentioned previously, entrepreneurs and VCs are partners. That is, they generally work very closely together to achieve a common goal (growing a successful company and getting to an exit). As such, it is critical that there be a good personality fit and ability to work together between the VC and the founder/management team. Finding the right venture capital firm is absolutely critical to companies seeking venture capital. Success yields you both the capital your company requires and significant assistance in growing your venture. Conversely, failing to find the right firm often results in raising no capital at all and being unable to grow your company.

   VCs invest primarily based on location, sector preference, and stage preference, but the other factors presented become more important after you create your initial list.

3. Finally, make sure the VC is active. Many VC firms that have websites aren’t active. That is, they aren’t making new investments. You don’t want to waste your time contacting and talking with these firms. Go to the press release section of the VC’s website and/or search Google News to see how active the VC is. If your venture capital deal isn’t done within a year, they probably are not actively investing in new deals and may not be worth contacting.

What you will be left with is a list of VCs that are actively seeking companies like yours. Once you have this list, you need to identify the right partner at that firm to contact.

 

Step 2. Identify the appropriate partner at each venture firm.

As mentioned above, venture capital firms are composed of individual partners (and associates that assist them). These partners make venture capital investment decisions and typically take a seat on each portfolio company’s Board.

Partners tend to invest in what they know, so finding a partner that has past work experience in your industry is very helpful. This relevant experience allows them to more fully understand your venture’s value proposition and gives them confidence that they can add value, thus encouraging them to invest.

Fortunately, most venture capital firm websites list their partners with great pride. Each partner typically has a bio that includes their educational credentials, business accomplishments, and VC investments that they have made. In identifying the right venture capital partner to contact for your company, try to find the partner that, from their background, will truly grasp the opportunity and can really add value.

Once you have identified the most appropriate venture capital partner, it is important to figure out how to contact them. As partners are often inundated with business plans, having a personal connection and/or introduction is often the difference between getting heard and not getting heard.

 

Step 3: Explore ways to contact the VC partner.

You don’t want to send the partner a full business plan or executive summary initially. Rather, you need to send them a “teaser” email to see if they are interested. You don’t want to “overshop” your deal, so let’s talk about how to most effectively contact these VC partners.

In order of effectiveness, there are three main ways to contact partners at VC firms:

1. Get an Introduction

Getting an introduction is the easiest way to get a VC’s attention. Because VCs are inundated with pitches from entrepreneurs, they simply lack the time to meet with everyone. An introduction gives you priority over other entrepreneurs who contact the VCs.

Six key types of individuals can introduce you to the VC you are seeking.

1. Entrepreneurs whom the investor has previously backed or is currently backing
2. Other investors with whom the investor has co-invested
3. Market, product, and technology experts such as senior executives at dominant companies or lauded professors
4. Lawyers, accountants, consultants, and other industry people
5. Angel Investors and Board Members
6. The venture capitalist’s online social networking colleagues

2. Meeting Venture Capitalists Online or Offline

Many venture capital investors participate in online social networks through which you can get introductions to them. You can also create relationships yourself with VCs through online and offline mediums including:

• Meet Them on Their Blog: Most of the top venture capitalists maintain their own blogs. For example, VC Brad Feld’s blog is located at www.feld.com, while VC Fred Wilson’s blog is located at www.avc.com. Once you find the blog, read their blog posts and comment on them. Your comments should add valuable insights to the posts; showing that you’re smart and someone the VC would want to know. After a few comments, the VC will start to recognize you. When they respond to one of your comments directly, you’ll have the chance to respond by asking them if they’d like to meet in person.
• Meet Them on X: Many VCs are active on X, so find them and then follow them. See what they’re posting about and use that to start a dialogue with them (via direct messaging, replying to a post, etc.).
• Meet Them on LinkedIn: LinkedIn makes it very easy to find and get connected with VCs. As you grow your LinkedIn network, you’ll gain more and more connections to VCs. Once the targeted VC is in your network, send them a LinkedIn message.
• Meet Them at Industry Events: All industries have events. And at these events venture capitalists who are interested in funding companies in that sector will come. For example, next month I will be attending the AdTech conference in NYC to learn about the newest online advertising technologies. One of the speakers at the event will be Tim Chang, the Managing Director of Mayfield Fund. In addition to Tim, I’m sure lots of other venture capitalists will be there.
• Meet Them at Local Events: Every major city has local technology and other events that attract venture capitalists. One of the best ways to find out about these events is at Meetup.com. I just searched on “venture capital” within New York City and found tons of local events that VCs will be at. Most smaller cities have less, but still plenty of events for you to attend to meet the right VCs for your business.

3. Contacting Venture Capitalists Cold

The final way to contact venture capitalists is “cold” – that is, without an introduction and without meeting them at an event or conference or online.

While this method is the most challenging, since you need to get through the VC’s filters, it can be highly effective.

The best strategy for contacting VCs “cold” is to email them. Calling them is much less effective as you will nearly always get their voice message and rarely if ever will you receive a callback. Usually, the email address of each partner is listed on the VC’s website. If not, call the VC firm to find out the partner’s email address.

 

Step 6. Send the Teaser Email

“Teaser” emails are emails that “tease” the VC into wanting to learn more about your company.

The teaser email typically includes 5 to 6 bullets about the venture and is very short (200 words or less). The goal of the email is simply to create a general interest in your venture so the VC commits time and energy to learn more about it (by requesting additional documents or setting up a meeting).

Below are sample two teaser emails (edited for confidentiality purposes) that I have used to generate tons of VC meetings:

Both of these teaser emails achieve their goals, which are to:

• Create intrigue and excitement
• Show that the market size was big enough
• Prove that the management team was capable of executing and could generate revenues
• Show key partnerships that could spur the company’s growth
• Create a sense of urgency (implying that we were going to get financing within 90 days with or without them)

 

Step 5. Prepare and Send Your Business Plan

Once the VC “bites” on your teaser email, the next step is generally to send them your business plan.

A lot of entrepreneurs like to think that business plans are no longer totally necessary – that they’re “old school.”

At Growthink, we have been helping entrepreneurs raise venture capital since the 1990s, so we remember the days when some startup companies got funded solely based on your business plan alone. We realize that those times are gone and that venture investors are much, much more rigorous these days.

It’s also true that your business plan usually is NOT the first communication you have with an investor. You shouldn’t just send your business plan around to venture capitalists left and right. Instead, at the beginning of your dialogue with a VC, you’re much better off sending a PowerPoint or an Executive Summary rather than the whole plan, unless the investor specifically requests to see your business plan.

To help you complete your plan, get our business plan template, and learn how to write a business plan for venture capitalists.

 

Step 6. Prepare Your VC Pitch Deck

A well-crafted venture capital pitch deck will contain the highlights of your business strategy and financial plan and should echo the clarity that is put forth in your business plan executive summary.

Learn more about how to create an effective pitch deck, complete with over 100 examples of pitch decks that raised funding.

 

Step 7. Meet with the VC

If your email and initial information exchange go well, the next step will be to meet with the VC, during which you will present your pitch deck.

Upon success with these meetings, you will move into the negotiations and due diligence phases.

VC presentations are similar to presentations to other parties such as potential corporate partners. Your goal is to succinctly present the key points about your venture, get the party excited, and expertly answer any questions they have.

Like other business presentations, it is critical to show up on time and dress appropriately (khakis and a button-down shirt often suffice, but don’t be afraid to call the receptionist of the VC firm and ask). Likewise, everyone you encounter during your visit is important, from the receptionist you meet when you walk in, to the analyst you wash hands next to in the restroom.

Treating anyone with a lack of respect could come back to haunt you. You need to be professional in every aspect of your presentation if you are going to be considered as a candidate for funding.

The venture capital raising process is a lot of work, but once you receive the multi-million check with which you can dramatically grow your company, you’ll agree it’s worth the effort.