Preparing for venture capital (VC) is no easy feat - particularly for businesses that are new to the world of fundraising. From understanding when you need to raise capital, to preparing a pitch and finding the right investors, businesses can expect to face a range of different challenges when they raise with a VC.
What is venture capital, and when would you need it?
VCs offer funding at various stages of the business lifecycle, but often focus on the seed or early stage of a startup. That is, they often back a company before it has achieved profit or even revenue. VCs may invest at this stage because the management team has intellectual property or an idea worth developing, and it provides an opportunity to buy equity in the business at a lower valuation. Pre-revenue startups can benefit from capital to help carry them through this early, critical stage in the company’s development.
Generally, an early-stage company would not be attractive to private equity (PE) because PE typically only have a mandate from their investors to invest in businesses with a certain level of profit and revenue. Unlike VCs, PE investors look to take a controlling interest in more mature businesses, with a goal to scale rapidly and sell, typically in a 3 to 5 year time horizon. An established company would look to PE for more than an injection of capital. PE investors often have sector expertise that helps drive expansion, increase value, and attract future investors or buyers.
Funding rounds summarised
Throughout the business lifecycle, a company will likely need to raise capital multiple times and during different periods of growth. These funding rounds are often referred to as Series A, B, C and so on. In each of these stages, a VC is looking for equity in exchange for investment. Simultaneously, companies are raising capital to reach different business goals.
Venture capital and company goals at each round
Round |
Goals of a Venture Capital firm |
Goals of Company |
|
Seed |
Invest in a company with a good idea that can be developed. |
Obtain funding to build and launch their idea. |
|
Series A |
VCs specialising in early-stage startups are looking for shares in a company with market share potential. Valuation is dependent on several factors. |
By this point, the company has a product and a customer base. With additional investment, they will continue to work on product and market fit, optimise processes, hire key staff and scale. |
|
Series B |
VC interested in later-stage and growth companies will invest in a company with revenue and a higher valuation. |
Investment helps a company grow operations, develop sales and marketing and scale to intimidate competitors. At this stage, companies break even and realise a net profit. |
|
Series C and beyond. |
VC funds seek shares in profitable companies (public or ready for an initial public offering). |
Companies are scaling rapidly, acquiring competitors, expanding to other markets and bringing new products and services to market. |
Determining readiness for venture capital
Each round of funding requires the company to understand how much they need to raise, and how much equity they are willing to exchange. A VC will make an investment based on what they think the company is worth and simultaneously, the business should raise based on what they determine they need. Asking for too much capital and years of runway can signal to the investor that you don’t anticipate your business gaining momentum, profitability or traction quickly.
While many businesses will try to raise as much as they can, we recommend financially modelling what capital the business genuinely needs for this stage of growth and aiming for an amount that is both realistic and provides enough runway to support the business until the next fundraising milestone — usually 12 to 18 months later. We also recommend factoring in at least six months of additional runway, if possible, for unexpected expenses.
It is also important to consider the amount of equity you are comfortable selling. With each round of funding, you may expect to sell approximately 15 to 25 percent of equity. The more equity that is sold, the less control the company founder or founders will have. It is vital to assess whether the additional capital is needed for the next stage of growth, or whether other means of financing, such as loans, may be a better option.
We also recommend that businesses segment budgets and forecasts into three categories: The necessary amount, a realistic amount, and an ideal investment amount. Planning separate strategies for each category will enable you to prepare your startup for different growth paths and identify the most appropriate VC to partner with.
Contact us
We are a trusted adviser to both venture capital firms and growing businesses, and our private capital specialists can offer 360-degree perspectives to best prepare your business for its raise. Contact our advisers to learn more about how we support companies looking to accelerate their growth.