VCs: How To Get Their Interest And Their Capital
Just as a VC firm is evaluating the startup, founders should also be assessing the VC firm when raising capital.
Entrepreneurs who have gone through the process of funding the creation and growth of a startup can tell you that the list of options for sourcing capital is longer than it might look from the outside. For most, the funding journey starts at home and grows as they move through the startup journey.
The path to capital can vary widely based on the experience and resources of the founder, the conditions of the market, and even the region where the startup is launching and growing. Navigating that path as a founder who is moving through the startup journey can be simplified if you understand the inherent players, benefits, and risks of the funding sources that are available and appropriate at each phase.
In fact, mapping out a plan for funding the business should be a fundamental part of the early idea work. You can have the most inventive product, service, or platform the world has ever seen, but if you can't build a sustainable business around it, the chances of it having a material impact in the marketplace are low. By understanding the 'players' at each phase, you are better able to put the right capital partners in your sights and do the work to align with their funding thesis and requirements.
In this post, we look at the 'Cast of Characters' who make up the private capital ecosystem. For each, you'll get a cursory understanding of who they are, who they fund, and why.
On average, 80% of founders report that they 'bootstrap' their startup in the early pre-idea days.1 In other words, they use their personal capital to fund the idea or invention they are building and bringing to market. There are good reasons for this very common decision.
The first, unsurprisingly, is control. A self-funded founder can make all the decisions about what they think is best for their growing company. The other main reason is risk. If the company fails, the founder is not in the position of having to repay investors.
The track record is good for bootstrapped companies. Most are very financially prudent, which may be why their survival rate is relatively high. The Small Business Association reports that more than half (52%) make it past the five-year mark, which is generally considered a resilience marker. In fact, the Bureau of Labor Statistics estimates that 70% of businesses that survive the first five years go on to survive the next five.
Bootstrapping is typically an on-ramp, but as the saying goes, it takes money to make money. For the majority of founders, the amount available to self-fund the earliest prototyping, team building, and early GTM work is finite. As you move into the idea and seed stages, the support team comes into play.* There are a lot of them.
On with the introductions.
Some form of angel investor is likely going to be involved in the first round of capital investment you take. You may still need to get a proof-of-concept in the market, but for them, that's okay. These people and groups are able and willing to invest in you (and your team, if you have one).
Angel investors are most commonly accredited investor(s) and high-net-worth individuals (HNWIs). They provide financial backing from their personal funds in exchange for equity or convertible debt. Along with capital, these individuals and groups will likely offer knowledgeable mentorship and valuable connections because they know your space – it's possible they work (or have worked) successfully in it.
Angels take a variety of forms, and often, they work in packs. The first is one you probably know – intimately.
A note on mentors and advisors. Super Angels can be exceptional sources of know-how and counsel. Most will provide seasoned guidance as part of their investment – think of them as advisors. The vital distinction between advisors and mentors is that advisors typically have some form of financial engagement attached to the relationship. Mentors do not. As a founder, you need both. Keep reading to see why.
Whether your angel is a member of your family, friend group, industry network, or involved solely as a capital and support resource, you'll want to vet them on a few important considerations:
At the seed phase, the amount available from an angel investor or syndicate may be insufficient to fund what you need to do to build your offering and business. At this point, venture capital (VC) becomes an excellent option for businesses that want to secure equity funding rather than debt funding. Most likely, you'll pursue work with a VC firm (though some corporations provide capital to startups that show the potential to help them get into or stay ahead in new markets).
For this article, let's look at the cast of characters in a VC firm like BIP Ventures.
Even if you've taken Angel funding, VC will be the first significant form of private capital you'll secure. Go into it knowing that VC is highly competitive and becoming more so. In 2012, about 0.3% of startups took in VC funding (Seed, Series A, or Series B). In 2022, that number dropped to 0.05% (or five out of every 10,000). While the trend shows that VC is susceptible to market forces, it also indicates that VCs are increasingly judicious about the companies they welcome into their portfolio. With fewer IPOs happening and the cost of those IPOs continuing to go up, VC is truly the best way for investors to participate in the Innovation Economy by backing high-growth companies when they are at their most affordable.2
Don't be discouraged. Be knowledgeable. VC investors want to see high growth potential and the potential to generate a significant return on investment. And they go to exhaustive lengths to support the companies in their portfolio.
You'll meet a few central players as you navigate the VC route. Some are inside the VC firm, and others are not. Let's start with the outside players.
One point of note – the titles that firms use will vary somewhat. We're referring to titles we use on our Investment team. (Meet them here.)
Ideally, your relationship with the VC firm will include follow-on rounds and carry you through to a successful exit. For some companies, success might be moving to a funding relationship with a private equity (PE) firm. For others, it's an event like an IPO, acquisition, or merger. Whatever it is, if your funding journey has aligned well with the phases in your growing business, you'll be well set up and ready to create, shape, and lead your industry for years to come.
*This article focuses on the people you'll encounter in the private capital funding environment. Of course, the U.S. Small Business Administration (SBA) also offers various types of financial assistance to small businesses. Most are aimed at those struggling to find funding through traditional channels. Keep in mind the SBA doesn't actually loan money – instead, it sets guidelines for partner lenders, community development organizations, and micro-lending institutions.