If your startup is growing quickly, you may be at the point where you’re ready to raise venture capital. But raising capital requires a lot of time, effort and sacrifice so here are three things you need to know before getting started.
Your business may not be ready for funding
Before you start meeting with investors, you need to consider whether your business is ready. Because if it’s not, you’re going to have a hard time securing the funding you need.
If you’re bootstrapping your business then it may be hard to hear that there are times when you should wait to raise money. But if you don’t have many customers or a proven business model then it’s probably not the right time to seek out VC funding.
So how do you know if your business is ready? Here are a few signs you may be ready to secure VC funding:
- You’re in a disruptive industry: The industry that you’re in matters when you’re looking for funding. According to Statista, investors are more likely to invest in internet startups with healthcare startups coming in second.
- You have a proven business model: You need to be able to show investors that you’re making progress and that there’s a demand for your product. You also need to explain what differentiates your product from what’s already available in the market.
- You have high startup costs: Venture capital is generally reserved for companies with high startup costs. Many small businesses can get started with just a few thousand dollars. VC funding is for companies that need millions of dollars to get started.
If you’re bootstrapping your business then it may be hard to hear that there are times when you should wait to raise money.
Look for the right investor — and start looking early
Like most things in business, securing funding takes a lot longer than you think it will. On average, it can take 14 to 19 months between funding rounds. For that reason, you need to start networking with investors and looking for funding before you feel ready.
Investors want to find a company that is the right fit and they want to partner with people they can trust. You should start building relationships early on and be able to show them that your company is continuing to grow.
Early on, create a list of 40 possible investors who might be a good fit for your company. You can use CB Insights to familiarize yourself with active VC firms and study their past deals. Know what industries these investors primarily invest in and what stages of investment they focus on.
If possible, reach out to your network to secure an introduction. If that’s not an option, you can consider cold outreach but having a personal introduction is the best way to earn an investor’s trust quickly.
Once you begin talking with investors, don’t come right out of the gate with a big pitch. Focus on building the relationship first.
Don’t just take the first deal you’re offered
Let’s say you have a validated business idea and your startup is growing quickly. Against all odds, you’re able to secure funding early on in the process. This may sound like a dream come true but taking the first deal you’re offered may be a mistake.
Yes, it will allow you to execute on many of your business ideas more quickly. But when you receive millions of dollars in funding, this comes with built-in expectations.
Venture capitalists generally aren’t interested in being silent partners so you’ll lose a certain amount of control over how your business is run. They want to see your business grow quickly and earn a lot of money. And if you’re not able to meet these expectations, they could ultimately replace you as CEO.
So before you agree to anything, make sure this is the decision that’s right for your company. Choose an investor whose vision is aligned with yours so this can be a profitable investment for everyone involved.
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