When you’re starting a business, there are a lot of things to think about. One important decision is whether or not to take on venture capital (VC) funding. This can be a great way to get your business off the ground and grow it quickly, and it’s important to make sure you’re getting the best deal possible. But where do you start? And once you’ve found a potential VC partner, how do you make sure you’re ready for due diligence?
Sourcing venture capital funding
When sourcing a VC deal, it’s important to find the right partner for your company. There are many different types of VC firms, so you’ll want to do your research and find one that fits with your business model and goals.
Start with your network:
One of the best ways to find potential VC partners is through your personal and professional networks. Talk to other entrepreneurs who have raised capital, attend startup events, and connect with VCs on social media.
Use online research:
Start by looking at lists of the top VC firms in your industry, such as Crunchbase or Mattermark. Then, read each firm’s website and blog to get a sense of their investment focus and portfolio companies, and shortlist ones that look like a good fit.
Do your homework:
Once you’ve identified a few potential VC partners, do your research. Read up on their portfolio companies, review their investment criteria, and ask for referrals from other entrepreneurs.
Reach out directly:
Directly reach out to the VC firms and introduce yourself. Pitch your business and explain why you think they would be a good partner. If they’re interested, they’ll schedule a meeting with you to learn more.
Preparing for due diligence
This is a critical part of the process, and you’ll want to make sure that you’re prepared. You should expect the VC firm to ask for a lot of information about your business, including financials, customer lists, product roadmap, and more. They’ll also want to meet with your team and see how you work together.
– Make sure you have a good understanding of the VC’s investment process. What are their timelines? How do they make decisions? What are their requirements for an investment? Knowing this upfront will help you avoid any surprises down the road.
– Have all your financials in order, including up-to-date Profit & Loss statements and Balance Sheets. You may want to have an outsourced accounting firm guide you through the process.
– Have a clear understanding of your business milestones and what it will take to achieve them. Be able to effectively communicate your startup’s value proposition.
– Prepare to answer questions regarding your business model, target market, competitive landscape, and go-to-market strategy.
The due diligence process is crucial before any money is invested. Using a CFO can help startups prepare and navigate the financial roadmap before and after raising capital.
You’ve found a potential deal and have already begun your due diligence, but it’s important to make sure you’re getting the best deal possible. Once you’ve found a potential deal, what should you look for before signing on the dotted line?
First and foremost, you’ll want to make sure that the terms of the deal are favorable to you. There are a few things that should be non-negotiable, including:
– The amount of money being invested. Make sure it’s enough to help you reach your goals and that you’re not taking on too much debt.
– The percentage of equity being given up and your startup’s valuation. This is how much the VC firm thinks your business is worth. You’ll want to make sure it’s fair and that you’re not giving away too much equity in your company.
Make sure you have a clear understanding of these terms before signing anything.
Another important thing to look at is the structure of the deal. How much control will the VC have over your company? What sort of board seats or observer rights do they get? It’s important to make sure that you’re comfortable with the level of control they’ll have.
You’ll want to make sure there’s a good fit between you and the VC firm. They should be supportive of your business and have a good understanding of your industry. You should feel like you can trust them and that they have your best interests at heart.
You want the VC firm to have a team that has relevant expertise and experience to avoid last-minute surprises. Make sure that you’re aligned with the team’s vision and that they have the skillset to execute on their plan.
Finally, you’ll want to look at the VC’s track record. How successful have their investments been in the past? Do they have a good reputation in the industry? Doing your research on the VC can help you make sure you’re making a wise investment.
If you’re thinking about taking VC funding for your startup, make sure you do your research and understand all the terms of the deal. It’s an important decision that can help you take your business to the next level. But if it’s not done right, it can also be a disaster.
If you’re looking for help sourcing or preparing for a VC deal, our team of CFOs and controllers are here to support you.