5 Questions to Ask Before Looking for Venture Capital

In my role as a mentor, I am often asked about how to get venture capital funding for a new startup or business. It’s a great question and a very important one. I have these conversations often enough that I thought I would jot down my thoughts. I’ve come up with a set of questions that I walk through to help people decide if they are ready and what kind of business financing they may need.

  1. Are you ready for the responsibilities that come with other people’s money?

    Accepting and using other people’s money will create a significant change in your business. With funding comes new expectations about how you use the money and how your business should perform. When you take money, you are now responsible for other people’s success, as they expect a return on their investment. It takes maturity as an individual to manage this risk. I always tell the folks I mentor that it may sound sexy, but 20 million dollars adds 20 million problems!

  2. Do you have a plan for the money you are raising?

    Business investors will expect you to have a business plan that lays out how you will use the money to grow your Startup or small business. Aside from the typical items in a business plan, they will want to know about the reputation and experience of your leadership team, the market conditions that may impact your business, and their exit possible strategies. They will also want to know how they will realize their venture capital investment; through payback, sale of the business, or even IPO.

  3. Are you ready to give up control?

    Investors will expect some level of control over your business. Family and friends may only offer opinions, but professional institutions, venture capitalists, and angel investors may expect you to change the way you do things. They will likely get involved in your daily operations. With funding, comes the added responsibility of needing to answer to others. Consider carefully if you are ready for other people telling you how to run your business?

  4. Will the money help you attract new talent?

    While this doesn’t seem like that big of a deal, it really is. Your business idea is nothing without the right people to execute. It is critical that your business story is compelling enough to attract the talent you need to produce the business growth they expect. Before asking for any funding, be sure you have a pipeline of candidates for your dream team.

  5. What kind of investors do you really need?

    Once you’ve decided you can handle the obligations that come with funding, you can determine what type of investors you need.

  • The first place to start is with family and friends. You can give them an opportunity to participate in your big dream. Through them, you may be able to raise a couple hundred thousand dollars. However, you need to feel confident that you will be able to use their money properly or risk losing the relationship.
  • Angel investors are wealthy individuals who are looking to personally make a financial investment in a business startup. They may just provide a one-time investment to get a business started or an ongoing investment to help with business growth. They usually expect a return on their investment or an equity position in the company.
  • Venture capital (VC) funding provides access to very large amounts of money but VCs are more sophisticated and will be strict with how that money gets spent. They typically take calculated risks in great ideas from great people. They can provide governance, experience, and market presence, but will hold you very accountable.
  • Strategic investors are investors from your industry. Most of the larger tech companies offer accelerator programs that will provide cash plus access to their platform. The return for them is that they get to stay close to new ideas and help promote the use of their platform through third-party apps.
  • Institutional funding is done through banks, mutual and hedge funds. They are typically used for business growth for more established companies. This kind of funding helps them double down on what is already working. They are more of a financial investor than a people investor.

Final thoughts – You will probably need all types of investors during your company’s lifecycle. Do your homework, have a plan, and be prepared. As you seek funding, differentiate yourself as much as your company, as many are investing in you as much as your idea. It is worth highlighting, your sales skills, as well as your ability to be an excellent story teller will be critical. You may find each time you give your “pitch” you refine it a bit more so thinking about how to prioritize meetings may be beneficial. For example, if you have your sights set on a particular investor, perhaps save that meeting until the end to provide additional opportunity to refine your story.

Lastly, ask yourself if you really need money. How long can you do without?  Ultimately your customers are your best financiers!