How to get VC Funding
Raising capital can be a long and arduous journey for some startup founders. It can be incredibly difficult to gain the attention of investors given the sheer number of startups that bombard them.
Planning ahead and having a clear, cohesive, and lucrative idea can help a startup stand out from the crowd and get them the seat time they need to convince investors that they are worth funding. Getting venture capital (VC) funding requires a startup to have a product-market fit, a great founding team with diverse talents, a pitch deck, and a general understanding of the VC firm or individual of interest.
All of these come together and create a highly competitive startup and will allow a startup to reach funding requirements.
Venture capital firms are investment firms that provide funding for startups. As a startup, it is important to understand the underlying reasons a VC firm utilizes to make investment decisions.
In a nutshell, VCs are looking to make their best assumptions of startup ideas that will be successful. When a startup is looking for funding and pitching their idea to a VC, it is paramount that the startup focuses on the aspects of the business that will enable its success. Creating a pitch that is able to sufficiently reduce the perceived risk an investing firm has will produce the best results.
Research the Market
Creating a new idea from the ground up is a mountain of a task and the founders that take on the challenge need to ensure their uphill battle is one that is worthwhile and will be able to get funded. To do this, a startup should conduct a market analysis including the current state of the market, analysis of competitors, and determining the product market niche. Establishing these early on in the startup will allow for a more refined vision and an ability to explain the market that a product is being created for.
Market research should be conducted on day one to ensure that the idea is one that has not already been taken or in an arena that is oversaturated. Once a market analysis is complete, the startup is able to determine where their prospective product fits into the current market and if it offers something unique enough to persuade the market that their product is better in some capacity.
An example of well-executed market research and product execution is Thrive Market. The online marketplace that offers wholesome nutrition at a reasonable price is not an inherently new idea. Many grocers during the COVID-19 pandemic pivoted to online grocery delivery, so what allowed Thrive Market to exist amongst big box stores offering delivery? The answer is that they offer a tailored customer experience based on dietary needs and preferences, they offer carbon neutral shipping, and they give part of the proceeds to underserved populations. Thrive Market was able to succeed because the founders built a brand unlike anything seen before in the grocery delivery space.
Being able to have something that sets your startup apart from the crowd will not only give you a better chance of getting funded, but it will also greatly improve the success of the business as it grows into its market niche. To become the next big thing, it requires a new idea that changes the landscape.
By ensuring your startup is unique in the market, you create a highly valuable asset that a VC is sure to back.
Build a Team
New ideas can sometimes come from what seems like thin air while others have had to work tirelessly to perfect the concept. Whether you are a founder that had an aha moment or one that has been tirelessly working on a new idea, the one thing that will dictate their success is the execution of the idea.
Carter Reum, co-founder of M13 states: “Ideas are a dime a dozen. It all comes down to execution. And by coming down to execution, it really comes down to the team.”
This illustrates the heavy emphasis placed on having a great founding team.
Traditional insights into what makes a great team is simply getting the best and most experienced team possible. While experience and a solid knowledge base is an obvious thing to look for in founding team members, a more important aspect to consider is the facilitation of a great founding team culture.
Think about a founding team as an all-star basketball team that has been put together for a tournament. Each individual player has earned their spot on the team with their own set of skills and experience. However, when it comes to game time, those skills won’t matter if the team has no team dynamic because they’ve never played together before.
A team built on the basis of creating a well rounded and great work culture will be able to work harmoniously and make it through a tournament successfully. This can be translated into a startup during the inevitable bumps in the road they experience along the way to an established business.
Smooth sailing is not a usual quality in the startup world and building a resilient team requires different criteria than the traditional approach of getting the most experienced individuals.
The best way to simultaneously build a good company culture and a resilient team is by creating a team that focuses on diversity, equity, and inclusion from the beginning. Building a diverse team is about finding talent that has a diversity of life experiences, opinions, skill sets, and perspectives.
Create a Pitch Deck
With an idea, team, and market, a startup has the basic necessities needed to seek out VC funding.
Getting VC funding is not just about having what it takes but it is also presenting the startup in a way that illustrates the worth of the startup. To do this successfully, a startup must create a pitch deck.
A pitch deck is essentially a slideshow presentation that overviews the startup in a clear and concise manner, illustrating the idea and explaining the startup’s capital funding requirements.
Almost all VCs will ask for a pitch deck before setting up a formal pitch meeting. Because of this, it is often recommended to have two different pitch decks: one to be sent to a VC for the purpose of getting the meeting, and the other to be presented during the pitch meeting.
How to Create a Pitch Deck states that every pitch deck should include:
- Problem at Hand
- Proposed Product Solution
- The Market
- The Founding Team
- Potential Competition
- Finances / Financial Forecasts
- Funding Requirements
The items above act as a guide to creating a pitch deck but ultimately the goal of the deck is to convey the pertinent information about a startup that an investor is interested in. The presentation in its entirety should be anywhere from 10 to 20 slides in total.
Taking the time to create a pitch deck that adequately encompasses the startup is a crucial step in getting VC funding. The pitch deck is the opportunity to sell the idea and gain investors and ensuring it is quality is well worth the effort.
With a pitch deck in hand, it’s time for a startup to begin the search for funding.
Some startups take a shotgun approach of reaching out to as many VCs as possible to get funding but this can be largely inefficient.
The more efficient and advisable method however is to do homework on the existing portfolio of the VCs of interest in order to gain a better insight into what that firm or individual is most likely to fund. VCs that have similar startups in their portfolio have experiences and connections within the market that could help a startup even more than simply getting funded. This process can take some time but it is a much better alternative than spending time pitching VCs unlikely to invest because the startup does not align with their investment thesis.
A great way to start the VC research process is to look into startups that resemble the startup in some capacity.
For example, let's say a startup wants to create a new voice-based social media platform. They could search existing platforms like Pinterest and Snapchat to determine which VCs funded those organizations.
M13 in particular has created what is known as our Launchpad in which we utilize our existing playbook as well as their network of connections to ensure a startup is successful. These added values of a VC can often be more influential than funding so finding a VC that is a good fit for a startup is crucial in ensuring the startup’s best interests are accounted for. Some VCs offer only funding and while that is undoubtedly important, finding a VC that provides broader resources and value will take a startup much farther.
The last step to finally receiving VC funding is to look over the investment offer and determine if it is fair.
In the world of venture capital, the decision to invest is one that is not taken lightly and as such may take some time for a VC to create an offer. When the offer comes, a response should be given fairly quickly to ensure that the funding is secured.
When assessing offers it is important to take many different things into consideration. Too many negotiations can harm the VC/startup relationship.
Here are two things to consider before answering any offer.
One thing that should be considered is the relative amount of risk a VC firm is taking on by providing funding. Statistically only a select few startups are able to deliver a return on investment for a VC and as such, gaining VC funding is crucial as not all investors are willing to take on that risk.
Having a solid founding team, a great idea, and having a well put together pitch deck all culminate to a reduced level of risk for investors and can result in a higher valuation which means that a VC is offering more money for less stake. Creating the best startup possible before seeking funding can allow the startup to offer that is more of a value.
Another factor to consider is the relative non-monetary value a VC can add to a startup. Venture firms like M13 in particular offer founders a plethora of entrepreneurial resources to give their startup the tools it needs to succeed. These services, while offered as a courtesy in some venture firms, should be taken into account when assessing an offer. An offer that may seem to be asking a lot may actually be a steal if these factors are taken into account.
As discussed, gaining VC funding can be an incredibly difficult task to undertake. Taking the process one step at a time and ensuring each piece of the puzzle is done to the best of the founder’s ability is the best way to get funded.
Gaining VC funding is all about finding product-market fit, creating a resilient founding team, creating a quality pitch deck, and researching venture firms. When the offers come rolling in it is important to respond in a time-sensitive manner and to keep in mind the non-capital value a VC can offer a startup to improve a startup’s chances of succeeding.