Equity Funding: Venture Capital
Our fourth article in this series to help you fundraise explains how VCs operate and what startups they consider.
Venture capital (VC) firms are entrusted with investors’ money to invest over a fixed time period (typically 10 years) based on pre-agreed investment criteria (stage, sector, deal size). They have professional teams to filter dealflow and perform due diligence, and often have sector experts to assess the technical aspects of a potential investee. They see as many as 3,000 deals per year, but may invest in less than 10 companies, so they are clearly highly selective to ensure they meet their investors’ expectations.
Most VCs invest in companies that already have consistent revenues, but there are some which focus on seed-stage investment, including a small number of SEIS funds, and a good portion of the EIS funds. Nonetheless, a standard rejection response from a VC tends to be “you’re too early”, which is another way of saying that the risk/reward balance of an investment in your business is not quite right - or possibly sometimes just an easy excuse.
VCs aren’t always in investment mode. They may be focusing on raising their next fund, or on exiting investments they have made in their current fund. So in addition to ensuring that you meet their key investment criteria before applying, make sure you check that they are open to new investment.
2 - 6 months, including due diligence and term sheet negotiation, but can be longer
Can normally provide follow-on funding for your next round
Often have good networks and team members focused on supporting your growth
Getting a reputable VC on board is a powerful signal of your potential to the market
Difficult to get a meeting if you don't have a warm intro
Hard taskmasters - most VCs set demanding targets and require rigorous reporting
Raising seed stage funds from VCs is highly competitive and can be a major time-sink