Startup Guide: 5 steps to getting early-stage VC funding

Venture capital funding is one of the most popular financing options that entrepreneurs pursue to scale up their business. When approaching a prospective VC, you need to keep in mind that they are, in turn, looking to maximize their capital surplus. A successful deal ticks the maximum boxes on the respective checklists of the VC and the entrepreneur.

Against this backdrop, here’s listing the five key steps that you will need to take care of to maximize the chance of finalizing the funding deal with the right VC.

Strong founding team

When you pitch to a VC, you are asking them to invest not only their capital but also their trust. And when a VC agrees to fund your startup, it is in the founding team that they are putting their trust. As per the 2018 CB Insights report titled “Top 20 Reasons Why Startups Fail,” about 65% of startups fail on account of “problems within the startup’s management team.”

In light of this, one might as well ask what is the quantified value of a good founding team when it comes to determining whether a startup will secure the funding? For the influential Israeli investor Gigi Levi-Weiss, weighing up the team comprises about 70% of his decision-making process when he is deciding whether to fund a startup or not.

A robust and defensible IP

After the founding team, the second biggest consideration for a VC is the startup’s business idea. For an IP to secure the trust of a VC, it must be unique, innovative, and easily defensible. It must not only be resolving a major pain point in society but must also be strong enough to dominate the market. Whether your value proposition has the potential to satisfy the market its product-market fit (PMF) determines it. A startup must identify its PMF before pitching to the VCs since they typically prefer funding early-stage enterprises that have high potential and can be scaled quickly and efficiently—all of which is tied to PMF. Its significance cannot be understated: according to recent estimations, 90% of startups fail because, among other factors, they are unable to clearly define their PMF.

Proof of concept

When you have come up with your PMF, you need to demonstrate its feasibility by presenting evidence of its success. It can be in the form of an early-stage success in the market and acceptance among the current client base. Proof of concept, complemented by data of early traction in the market, is how you can persuade a prospective VC to fund your vision. This is also how you can demonstrate the value of your team’s commitment and ability. Thus, bolster the trust of the VC in your IP and your organization.

Command of pitch

Now comes the time when you put it all together into a brief presentation for the prospective VC. However, it is much more than a mere presentation. When you have secured a meeting with a VC, your task is to communicate your business vision and plan to them as effectively as possible. You need to not only show your product but also communicate how your company aims to bridge a need-gap through the product offering; how much profit the venture will generate in the process.

You will need to prepare more than one type of pitch deck to communicate your idea in short and long forms. This is in preparation for pitching your business to a VC in the most unexpected of circumstances. Consequently, you will need to be in command of your business idea and vision, so that you can present it in any form—be it as an elevator pitch or a formal investment proposal—in any place, be it a scheduled meeting or a chance encounter in a casual networking scenario.

Due diligence

A successful meeting where you have impressed the VC is not the end of the process. After one meeting will come a series of meetings in which the VC will review the team. They will check your business potential, your service/product offering, the industry you aim to disrupt, the market space you aim to capture, current assets you possess, potential risks that may come up, etc. Due diligence is the part where the VC is calculating whether you comprise a good investment opportunity or not.

After the VC does determine the value of your potential and agrees to invest, they will share a terms sheet with you carrying the details of a deal proposal. This document will include negotiable information that both parties need to agree on to close the deal. When the deal is finalized—after following through steps 1 to 5—you will finally receive the sought-after financial shot in the arm.