What is a venture capital fund?
A venture capital (“VC”) fund is an institution that invests in young, innovative companies with high growth potential. VCs provide not only capital but also strategic support, expecting a significant return on investment over a period of several to a dozen years.
VC funds often specialize in specific industries or startup development stages. Most often, they decide to invest in companies at the following stages:
- Pre-seed: the initial period of startup development, usually covering the time until the idea is transformed into an MVP (minimum viable product – the first working version of the product that can be made available to external customers) and establishing a basic business model
- Seed: a stage involving further product development, organization, and team building
- Series A: scaling operations, entering new markets, and refining the product offering
- Series B, C, and further: further scaling and expansion.
The fund’s participation in the company is usually realized through the acquisition of shares or stocks – the investor thus becomes its co-owner. Typically, their representative also gets a seat on the company’s supervisory board.
The size of a possible fund investment is determined by the investment ticket, which is the level of capital allocated to a single investment, recorded in each fund’s investment strategy.
More and more funds offer so-called smart money, which is support that goes beyond just financial capital. It includes sharing industry experience and knowledge that helps startups avoid typical mistakes and make sound strategic decisions. VCs provide an extensive network of business contacts, facilitating the establishment of key partnerships and customer acquisition. They also offer operational advice in areas such as management, marketing, or product development. Investment from a reputable VC often increases the credibility of the startup, which can be crucial for its further development and market success.
Obtaining financing from a VC requires careful preparation, and the investor’s decision is preceded by a thorough analysis of the startup in terms of, among others, financials, business model, founding team, market potential, innovation, and legal aspects (see below).
Is VC funding the right path for your startup?
Do newspaper headlines talking about multi-million dollar rounds raised by startups from VC investors ignite your imagination? Ours too, but that doesn’t mean it will always be the optimal development path for every project. There are many sources of funding, and it’s worth considering which one might be optimal for you.
Alternative funding sources for startups
What funding sources can you use as a startup founder?
| Funding Sources | For whom? |
| Crowdfunding | Best for early-stage products or ideas with a strong consumer aspect that need validation. |
| Angel Investors | Suitable for startups with a validated idea and early traction, needing funds for further development. |
| Grants and competitions | Useful at any early stage, particularly accessible for founders of innovative or socially significant projects. |
| Incubators and accelerators | Suitable for startups that can already demonstrate significant traction, with a scalable business model. |
| Corporate Venture Capital (CVC) | Best for early-stage startups that align with the corporate strategies of large enterprises. |
| Bank loans | Suitable for startups with an appropriate financial history or adequate collateral, though rare in very early stages. |
| Venture Building | Ideal for founders with ideas for technological solutions, needing comprehensive support in building and scaling. |
| Bootstrapping | Suitable for early stages where founders reinvest revenues into business development, maintaining full control and ownership. |
VC funding is thus one of many possible development paths for your project, but it may not always be the optimal one.
How to increase your chances of securing VC funding?
Statistically, less than 1% of startups seeking funding actually receive it. What makes a project end up in this group? Let’s look at what investors primarily pay attention to:
- Business innovation and scalability:
– Unique solutions to market problems
– Creation of new product or service categories
– Preference for scalable solutions using innovative technologies - Target market size:
– Large potential market
– Possibility of global expansion or significant share in the local market - Product development stage:
– Product or service is in the MVP phase
– Product or service has undergone initial market validation
– First signs of traction (i.e., growth in indicators showing that the startup is repeatedly acquiring and retaining customers) - Founding team:
– Experienced, mutually complementary team members
– Leadership skills and adaptability
– Clear vision of company development and market understanding - Business model:
– Offering the prospect of rapid revenue growth with controlled scaling costs
– Many investors declare particular interest in projects based on subscription models (SaaS) or marketplace platforms - Investment exit potential:
– Anticipated attractiveness for potential buyers in a 5-7 year perspective
– Alternatively, potential for an initial public offering (IPO)
– Operation in a sector attractive to buyers or stock market investors
More about what investors look for in startups and how to convince your dream fund, we wrote in earlier articles (here and here).
How to find and choose the right VC fund?
Start by identifying funds that invest in projects from your industry and at the same stage of development. You can use online databases such as Crunchbase, PitchBook, and AngelList.
It’s also worth getting recommendations from the startup community, primarily from startups in a similar industry or operating on a similar business model as your project.
Criteria for evaluating VC funds
When choosing funds to talk to, it’s worth checking:
- How long has the fund been operating in the market?
- How many investments has it made so far?
- Which industries, sectors, and business models does it most frequently invest in?
- Does it have experience in investing in startups at a similar stage of development as ours?
- What are the biggest successes of the fund and its portfolio companies?
- Have the company founders managed to scale the project to a national or international level of success? Has any of them achieved a successful exit, e.g., through acquisition by a large industry investor?
- What is the experience of the key people managing the fund?
- Does the fund have experience in conducting subsequent funding rounds? Which other funds has it collaborated with during subsequent rounds?
- Does it have experience in the international expansion of startups?
- What is the fund’s approach to investment exits? What experiences does it have in this area?
- Does the fund offer its portfolio companies so-called smart money (i.e., additional non-financial support)?
- What are the opinions of other startups that have worked with this fund?
- Does the fund have the ability to participate in subsequent investment rounds of the startup?
- Does our startup meet the fund’s investment criteria (especially regarding the development phase, geography, investment ticket)?
Answering these questions will allow us to better assess the experience, potential, and compatibility of the VC fund with our project and vision for its development.
How to make the first contact with a VC investor?
In your first contact, remember to be concise: the message should be short and specific. Don’t forget to attach an investor presentation (pitch deck) – it’s the most important material for the investor. We wrote about how to compose a good pitch deck in this article. If possible, ask for an introduction to the fund through a mutual acquaintance. Such an “intro” usually facilitates the first conversation and obtaining the first meeting.
Do your homework and research the fund you’re contacting. Learn about the organization’s specialization and investment preferences, and tailor your message to the specifics of that fund.
Don’t forget about follow-up: give investors time to respond, but in case of no reaction, don’t be afraid to remind them with a request for a response after a few days.
Remember that making the first contact is just the beginning of the process. Be prepared for subsequent stages such as meetings, presentations, and due diligence. A professional approach from the very beginning will increase your chances of securing VC funding.
Fundraising happy ending?
Finding the ideal VC investor for your startup is a process that requires careful preparation, market research, and a strategic approach. Remember that a relationship with a VC fund is a long-term partnership that can significantly impact the future of your company. The key to success is not only raising capital but finding an investor who will add value through their experience, contacts, and strategic support. Be prepared for a long process, but don’t get discouraged – the right level of fit between your startup and the VC fund can be a catalyst for spectacular growth and market success. Remember that every interaction with a potential investor is an opportunity for learning and development, even if it doesn’t end in investment.
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