There's no doubt about it -- startups are expensive. If you're looking to validate a market, prove out a pricing model, or put together the right team, you'll need resources. Time and money are the most common resources for startups -- and the more you have of one decreases the amount you need of the other.
Businesses with a small burn rate often don't require much funding to get started because they're cash efficient. Those pursuing massive opportunities in a competitive space are fighting for every second on the clock.
If you're in need of funding, one option is to work with a venture capitalist. But, what is a venture capitalist? And is it the right funding option for you?
What Is a Venture Capitalist?
A venture capitalist (VC) is an investor that works with high growth potential startups. They can get you access to resources and know how to grow your business on the fastest scale possible.
Venture capitalists invest outside equity from professionally managed pools of money. This isn't your uncle Bob writing your business a check for $10,000 -- this is someone who invests in new startups every day.
The funds come from a group of limited partners (LPs) from whom the initial fund was raised. And the total amount raised by a fund often tells you what type of investment stages they're interested in.
However, a VC is more than a check, at least a good VC is. Venture capitalists are partners in your venture and while they provide you with a check the most value they can bring to the table is their know how.
Venture capitalists work with a lot of businesses and are good at pattern matching, identifying issues other businesses have faced, and recognizing when you're experiencing a similar issue. A venture capitalist often sees hundreds of businesses every year and works closely with a handful of them.
This gives them experience in founder dynamics around managing conflict, scaling a team with various sales channels, and ultimately how to take your business from point A to point B. This is why companies that are looking to go far and go quickly often need to take the venture capitalist route.
Venture Capital Firms
Depending on where your startup is based you may have different options available to you for connecting with venture capital funds. Here is a list of top funds in the U.S. grouped by region:
Region: East Coast
Noteworthy investments: Lessonly and Workfront
Openview works with companies of all kinds to help with their expansion stage and go-to-market strategy. With over $5 billion under management, their portfolio includes more than 200 companies in technology and healthcare.
Region: East Coast
Noteworthy investments: LinkedIn, Pinterest, and Twitch
Bessemer works with early-stage companies in the consumer, healthcare, and enterprise industries and are there every step of the way thereafter. They helped one portfolio company bring in $25 million in new pipeline and $5.9 million in closed-won deals after building out their BDR team.
3. Union Square Ventures
Region: East Coast
Noteworthy investments: Quizlet, Soundcloud, and Kickstarter
Union Square Ventures works with larger companies who have successfully established an engaged user-base. Since 2004, they have invested in over 100 companies, spanning different sectors and geographies.
4. First Round Capital
Region: West Coast
Noteworthy investments: Beautiful AI, Birchbox, and Mint
First Round Capital is called First Round for a reason -- they work with seed, pre-seed, friends and family, angel, or anything in between. They don't have a specific industry focus or sector.
5. SaaStr Fund
Region: West Coast
Noteworthy investments: SalesLoft and TalkDesk
SaaStr Fund works with four to five up-and-coming companies per year, investing anywhere from $1 million to $5 million per deal. They only invest in companies that are a part of the SaaStr.com community.
Region: West Coast
Noteworthy investments: Airbnb and Dropbox
Sequoia started partnering with companies early and at every stage of growth in 1972. The founders of the companies they've invested in now have an aggregate, public market value over $3.3 trillion.
7. Matrix Partners
Region: West Coast
Noteworthy investments: Hubspot, Quora, and Zendesk
Matrix Partners works in early-stage investing, backing founders building companies across B2B, infrastructure, and consumer technology. They've invested over $4 billion and have had over 110 profitable acquisitions.
8. Hyde Park Ventures
Noteworthy investments: G2 Crowd and Shipbob
Hyde Park Ventures funds early-stage technology companies in the Midwest. They focus on investing in technology companies with B2B SaaS and consumer marketplace business models.
9. Matchstick Ventures
Noteworthy investments: Inspectorio, Branch, and Upsie
Matchstick Ventures invests where innovative ideas, huge markets and, most importantly, diverse founders strike. They're honored to support "underdog" founders who will stop at nothing to succeed. Matchstick exists to act as a catalyst for our founders, our partners, and our startup communities.
10. Foundry Group
Noteworthy investments: Techstars and Yesware
Foundry Group focuses on Seed and Series A investments in technology companies throughout the US and Canada. They're thematic investors looking for new businesses along certain problem or theme areas.
Venture Capital Funding
A venture capital funding is a financing event where the lead investor is a venture fund. The lead investor sets the terms of the round with the company and acts as the primary negotiator. They set the valuation of the business before the infusion of capital (the pre-money valuation).
In a venture capital funding, the lead investor is often the investor that contributes the most money for the funding round. They oversee the negotiations and formalities of the round like determining board structure and employee option pool availability.
Having a venture fund lead your financing round dramatically increases the speed and likelihood of closing the round.
How to Get Venture Capital
There are no silver bullets when it comes to startups but there are a few things you can do to improve your odds of securing financing.
Be prepared before you try to get money.
Have your materials ready.
Pick the right amount to raise for your round
1. Be prepared before you try to get money.
Every company, even early-stage companies have the ability to de-risk the business to some extent. For example, you could build a prototype of your software to show its feasibility and get feedback until you're ready for pre-sales of your product.
The point here is you should try to de-risk the business as much as possible. Validate that your technology is feasible and that your customers want it, and suddenly the investment starts to feel like more of an opportunity and less of a handout. Examples that de-risk your business:
Early customer traction or pre-sales: sales are made before the initial product launch
Product readiness: your product is closer to a beta or 1.0 launch than a prototype
Operating history: the ability to demonstrate running the business for a period of time
Team composure: having all the main functional areas covered in-house, tech companies need tech people and business people
2. Have your materials ready.
The main material in most early-stage financing conversations is your investor deck. A good deck will communicate what you do in 30 seconds, explain the problem clearly, show your solution from a high level and with a demo, and finally dive into traction, differentiation, and the market opportunity you're pursuing. There are several ways to present this information for maximum effect. For more information on how to put together your early stage investor deck take a look at these sample templates from Techstars.
The other key material that's often overlooked in financing is your investor pipeline. This is typically a spreadsheet or CRM pipeline that lays out who you'd like to talk to, why you'd like to talk with them, and key details behind their fund (amount raised, average check size). You'll want to do your homework here to include only funds that invest in companies like you at this particular stage. Meeting with investors who only do consumer investments when you're a B2B, or who only do B round deals when you're raising a seed just won't cut it.
3. Pick the right amount to raise for your round.
What's in a number? If that number is the amount of money you're raising, then an awful lot. For example, your fundraising number shows how you're thinking about how long you have until you run out of cash, when you'll need to fundraise again, and how far along you are in your funding journey. Seed stage companies that set out to raise $1.5 million or more wound up hitting that number less than seed stage companies who set out to raise only $750,000.
In picking the number for your round you want to have a number that provides a reasonable amount of runway, but also a number that lets you build momentum around your investment quickly.
Angel Investor vs. Venture Capitalist
Angel investors are individuals that invest in startups. Unlike venture capitalists that deploy funds on behalf of their limited partners, they invest their own money. Angel investors play a large role in the early-stage financing process, and many are successful entrepreneurs and supporters of the startup ecosystem.
The benefit of working with an angel investor, if they're relevant to your market and product, is they can provide relevant advice and make solid connections with other investors. Every startup community has some sort of angel investor presence. These are folks powering a lot of early deals but don't confuse them with venture capitalists.
When working with angels, ask them about other companies they've invested in. Some angels are great at working with other companies, while some aren't so great. By backchanneling with other founders and community members you can find out exactly who you're talking to. In having these types of conversations it is good to talk to both founders that have gone on to be successful and others who haven't. This way you'll know who has your company's back when times are tough.
The last note around angels is that they often times do not have minimum investment requirements. This does not mean that you should not have a minimum investment requirement. Raising $500,000 off of $10,000 checks will drain your time and energy so much that your business will come to a screeching halt. Setting minimums on your financing round shows investors, both VCs and angel investors, that you value your time and take yourself seriously.
If you're looking to not only go far but also go quickly, then venture capital might be the route for you. If you have a big market opportunity, a good team, a stellar product, and the willingness to put in the work, you might be right for it. With new ventures, everyone starts at zero, success is just a matter of how quickly you level up. To learn more about startups, read about startup burn rates next.
Originally published Jan 25, 2019 8:30:00 AM, updated January 25 2019