December 16, 2021

Why Raise Money from Venture Capital Institutions

Should your business pursue venture capital funding? There are several factors and reasons this path could be a great fit, but keep in mind that VC funding isn’t a good solution for every business.

Keeping in mind the advantages and disadvantages of VC funding will guide you in making this decision.

Here’s a breakdown of different reasons why you would (or would not) want to seek VC funding:

1. Your business model NEEDS a serious influx of cash to see real growth.

Companies that require expensive resources(tech/equipment/talent) to produce their product or  need a serious number of buyers(followers/customers/clients) to gain velocity will benefit greatly from strong funding right from the start.

Bootstrapping is a great approach for some companies, but many require strong funding to bring a product to the limelight and reach prospective customers. Some ideas also need significant R&D, product development, and refinement before they are stage ready. Speed to market is another important aspect if your product is sufficiently unique but not something patentable/defensible. Do you need to acquire that extra cash to capture the market quickly before a copycat does?

The important question to ask here is can you bootstrap your idea or market your product to retain full ownership in your company until it succeeds?

2. You don’t mind sharing ownership or plan on selling the company.

Nobody gets money for free.  Although VCs are here to help you, they do so with the hope that your company will succeed, enabling them to realize a return on their investment. Unlike typical investors, VC generally tend to be the smart money in your business; they will make every effort to drive things forward and will be in a position to help you achieve your goals, be they fundraising, making introductions to new potential clients, or taking a reference call for you.

Depending on your perspective, this can be a positive or a negative. Be sure to ask VCs how they usually engage with their portfolio companies and tap into resources that you feel are useful.

This extra involvement from VCs can help significantly.  VCs have powerful networks of smart and successful people at their disposal. Asking for introductions and advice can take your business to the next level. If you don’t want either of these and all you require is capital, VCs could still be interested in investing if you have a great product. However, you wouldn’t realize the full value of these relationships.

3. You’re building a BIG business.

VCs want to work with big ideas that have massive TAMs (total addressable markets), which makes a venture backable. Businesses that address markets of at least $1B in size are usually the ones that make the cut; understand that most businesses VCs invest in don’t turn into billion-dollar enterprises, and most go belly-up within 5 years. VCs tend to invest in a portfolio, a collection of 10-30 companies that ensures even a single company could pay off the whole portfolio or return the venture fund. They are in a high-risk, high-reward investment.

If your company doesn’t have big plans and you’re looking for smaller amounts of funding(<500k), approaching VCs may not be right for you. Consider bank loans, small business loans, grants, and even venture debt could be an option.

4. Do you have time to make this happen?

Working full-time is a prerequisite for raising money; institutional VCs will not engage with you unless you are committed to working full-time on your business. The due diligence process for some lead investors can take upwards of six months, which means that while you are raising capital, you still have to have to run your business and show growth and progress. Having a support system and team is crucial to surviving the diligence process

Securing funds can take a lot of time and a lot of meetings.  It might all happen at once, but most likely, you’ll be spending most of your time fine-tuning your pitch and running from meeting to meeting.

Do you have this kind of time, or would your time be better spent working on the business?

Most VCs would like to build relationship with the founders before they actually invest. I would recommend cultivating these relationships through investor updates and informal meetings with potential VCs in your area; get to know them and keep them apprised of your plan. When the time comes to raise funds, you may have a better chance of securing investment and will be able close the deal more quickly.

5. Have you built a plan for the use of funds?

Creating a comprehensive plan is crucial when raising money, and not just a plan like, “I”ll take the $100k and buy a Super Bowl ad.”  In-depth financial plans that show where the money will be used, why it’s needed, when you’ll use it, the expected outcomes, and most importantly, a document that provides a comprehensive overview of different scenarios and assumptions that support your claim. VCs usually dig deep into these assumptions and projections and validate if they are realizable. Be sure that these projections are not unrealistic; any future projections should be validated by a tried and true process. For example, if you plan to market your product through Facebook/Google ads, you should have already have run experiments and found CAC (customer acquisitions costs) by channel, keywords, scalability of each channel, LTVs (lifetime values of customer), etc.

Dedicate substantial time to developing a strong plan. Imagine you were the investor; would you want to give a large amount of money to someone who was unsure what they would do with it?

6. Will money solve your businesses problems?

It’s easy to think that a lot of money will solve your problems, but there is every chance that your company isn’t working because there may not be a path to success without the right resources, such as technology, talent, location, etc.

Throwing money at a failing company won’t save it. For example, take a look at Blockbuster; their business model couldn’t keep up with the likes of Netflix. It was a model that was dying, and pumping more money into something like it never helped.

Have you heard of sunk-cost bias?  When we put a lot of time, money, and effort into something, we believe in it more and more. Once you’ve put in more money, each bit that is added feels like it’s going to help and is necessary to make the business succeed, but the fact is, the more money you keep throwing at a failing idea, the more money you’re wasting.  Just because you have already put a lot into something doesn’t mean you should put in more.

A cash-infusion bandage won’t save your business, and most investors will see this as they look at your financials. You’ll be wasting your time setting up meetings with investors who have no interest. VCs tend to invest in companies that are growing at an extreme pace (10-20% month over month), not in companies that need to be kept afloat.

7. Is this the best timing for funding your business?

If you’re just going after funding because you think it makes sense at this stage, that’s not enough. Focus on growing the business with what you already have and only seek funds when they will be most beneficial.  Funding should be seen an accelerant of growth, not a life support for the business.

Funding rounds are usually successful when businesses have strong growth behind them and have achieved good product market fit or early traction through some large corporate clients or a viral growth in the customer base. Investors like momentum, especially VCs. Raising money to grow your client base through talent acquisition, refining of the product, and aggressive advertising are some of most common uses for funds. On the other hand, even a slow-growing but profitable business that can sustain growth independently will not need any outside money.

Take a good hard look at all of the above factors before you decide if venture capital is right for your business. If the answer is no, you may be better off waiting or not raising funds at all.  

If you do find that it’s a perfect fit for your business, start building a relationship with your local VC; you may also reach out to us on our contact form here.  We love to see great pitches!


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