Okay, so you have a business idea … or maybe you are already running a startup in its initial stages. The funds required for growth can come either through the cash earnings of the business, the owners’ savings or from investors. In this article, we will dig deep into venture capital financing: what it is and how to fund your new business through this means.
In 2018, Indian startups raised $12.68 billion in equity funding, plus $1.14 billion in debt funding, across a total of 864 deals.
How to get Venture Capital (VC) funding
Applying for VC funding usually involves these four steps:
- Submission of business plan.
- Introductory meeting.
- The VC firm researches the proposal.
- Term sheets and funding.
Before we list the steps involved in applying for VC funding, let’s define the term. Keep reading for tips on how to increase your chances of getting funded.
What is venture capital?
Venture Capital firms pool cash from different investors and invest it in emerging companies/startups that they believe have the potential for long-term growth and returns.
VC firms provide money in exchange for equity or a share of ownership.
The earlier they invest in a successful startup, the more returns they can reap later on. Not all the businesses they invest in succeed however. Hence, venture capital financing groups operate on a high-risk and high-return model of investment.
Along with funding, these firms also provide strategic advice, networking with potential customers or partners and help in entering new markets.
Related: What is a startup incubator?
Process of getting venture capital financing
There are primarily four major steps in seeking VC funding. Let’s discuss them one by one.
1. Submission of business plan
This is the initial step of approaching a venture capital financing firm. The plan needs to be detailed and should cover the following points:
- Executive summary of the proposal
- The consumer problem you are trying to solve and its market size
- Analysis of the competition
- Financial projections, with realistic assumptions
- Details of the founding team, along with their credentials
Post submission of the business plan, VCs can ask questions or clarifications on your product and business. Be prepared to answer them with supporting data points.
Since VCs keep busy with several business proposals, keep following up (at regular intervals and gently) for feedback.
Related: How to write a business plan
2. Introductory meeting
Setting up a meeting with the core team can take a long time so be patient. In this meeting, you’ll present your proposal to the VC firm and answer any doubts or queries of the investors.
Post this meeting, the firm decides whether to invite you for the next stage of the process or not.
3. The VC firm researches the proposal
Once the venture capital financing group determines that your startup fits within the investment methodology of the fund, they follow up with business and legal processes. This is where their experts dig deeper into your business plan and its potential.
An analyst from the VC firm evaluates the risk and return from their point of view. If the analyst decides the business idea is promising, the deal is transferred to the VC firm’s legal team to verify the documents on the business.
4. Term sheets and funding
If the VC is satisfied with what they’ve learned, they then proceed with sharing the financing term sheet with you.
A term sheet basically contains the commercial and legal conditions of the funding. You will then meet with the investors to negotiate on terms like:
- Exit clauses
- The number of board members and their rights
After accepting the terms, legal experts document the deal and the funds are transferred to your business.
How to increase your chances to get funded
Getting venture capital funding is quite competitive — less than 1% of startups succeed in achieving this.
However, you can increase your chances of being noticed by a venture capital financing firm and eventually getting the most coveted financial support from them.
Below are some key points the VCs consider before investing in a company. You can work on these points, turn them into your strengths and enhance the chances of gaining their trust.
- Constitution of the company (private limited company is preferred by VCs)
- What is the market size of the problem that the company is trying to solve?
- What is the level of threat from competitors?
- Has the business already proven a demand for the product or service?
- Can the idea/product be replicated on a large scale?
- The credibility and experience of the founding team
Across the globe, VCs mostly invest in companies that are working with the latest technologies and offer huge potential for growth. In India, startups that are favoured by VCs operate in these fields:
- Artificial intelligence (AI)
- Financial tech
- Education tech
- Big data
- Internet of things (IoT)
Here is a comprehensive list of all the major investments in Indian startups since 2015. You can get a better idea about the latest trend of funding by analysing this list.
Prominent venture capital firms in India
Selecting the right VC firm is essential, as it can have a long-term impact on your business.
Just like a marriage, founders and investors work together over a long period of time. They go through different phases of the business’ ups and downs. So, like marriage, trust is the key element in this relationship as well.
India is home to some renowned VC funds and here is the list of the most active VC firms, including contact information for each. From established companies to individuals, you’ll find them all in this list.
Venture capital funding is the most coveted source of investment for startups, as it boosts the growth of a company. VC investors not only provide the required capital but also extend their advice and guidance to business founders.
VC funding is a long-term relationship and hence, it should be chosen wisely. Track the latest trends in funding and pursue your entrepreneurial dream with full rigor. All the very best.