Entrepreneurs use various channels to raise money for their business enterprises and startup ventures. Not all these channels, however, are as profitable as for each other. One popular method of raising funds is applying for loans, but there is a high chance of getting rejected more than once. Instead, entrepreneurs can turn to venture capital for the funds needed to grow their businesses.
Venture capital refers to raising money from investment banks, investors and other NBFIs, which is used to start or scale up a business. Funding a startup is a risk that investors take, but it can pay huge dividends should the business take off. This is an excellent channel for entrepreneurs because they have this option even if other traditional channels or banks aren’t lending them money. Venture capital for tech startups is raised depending on how promising the business is and how likely the investors think the business is to succeed.
Why do Startups Choose VC (venture capital) Funding?
Banks often don’t lend money to startups in the same way that they offer business loans to other enterprises or corporations. A traditional loan agreement entails repayment of the principal amount and a fixed interest by the borrower to the bank.
Banks use financial models, balance sheets and income statements of businesses to decide if they can be given a loan. However, during the initial phase of doing business, there is not much to show in these documents, and there are no substantial assets for the banks to use as collateral. Established businesses can offer patents, equipment and factories as collateral in case of foreclosures. Meanwhile, software startups could offer nothing more than a few office supplies and laptops.
Venture capital firms are in a better position to evaluate startups in their early stages. They use metrics like the product, potential market size, and the founding team’s credibility rather than financial statements and collateral.
Steps to Close Venture Capital Deals:
Startup enterprises who wish to get funded through venture capital need to start by sharing their business plan with a VC company or investors. This business plan needs to be more detailed and display the growth potential. Investors and venture capitalists will only invest if they know exactly what their money is going towards and what steps are being taken to ensure business success.
A potential investor then researches the company, its history and credibility to decide if it is worth their time and financing. This research includes in-depth research into the history of operations, business model, management team and strategy and the product, among other factors. Investors will check anything that their money is going into to ensure it’s a wise investment.
Once they have carried out their due diligence and are sure they want to invest in the business, the investor pledges funds towards the business in return for equity ownership of the business. Venture capital can be offered as a one-time lump sum or multiple smaller pieces after various milestones are covered. In cases like the latter, investors play an active role in the management and observation of the business’s progress. Only if their faith is reaffirmed through the actions of the business will they continue to fund the enterprise.
How to Get a Venture Capital Investment for Your Business
If your startup requires funds, aim to work with a venture capital firm or an angel investor so that you can get the funding you need without worrying about being pre-approved by banks. Venture capitalists not only provide you with funds, but they also come with years of entrepreneurial experience and mentorship that can help your business grow.
