Verbit.ai posted on 22 Jul 2019
Today’s tech industry wouldn’t be the powerhouse it is without venture capital, and VCs’ influence only continues to grow. In 2018, we reached a new peak for VC funding — $130 billion across nearly 9,000 deals. The last time we came close to that level of funding was at the peak of the dot-com bubble in 2000, when funding reached $100 billion. Are you one of these seeking venture capital?
With so much money invested by VCs, it’s natural for some tech founders to assume that raising venture capital is their only option. But that’s simply not the case. You may be surprised to learn that only .05% of startups ultimately receive VC funding.
The decision to pursue and accept VC funding is a serious commitment. Although accepting funding from a VC provides access to financial and other resources, it also means sacrificing a level of control over how you run your business. So, before diving in and start seeking venture capital, you need to make sure it’s the right move for your startup.
How do you know if outside funding is right for your business?
Generally, there are two variables that influence startups to pursue VC funding — the size of the market they’re trying to serve and the speed at which they want to scale. I founded Verbit, an AI-powered transcription company, and for us, taking VC funding made sense based on those two variables:
First of all, we can serve a large market. Voice transcription has many applications across many industries, including the legal space, higher education, entertainment, and others. Currently, no one else offers those industries a real-time transcription tool like ours.
Secondly, we needed to grow rapidly to realize our large market potential.
Not all markets are big enough to warrant VC funding. For example, before founding Verbit, I launched an app security startup. Although there are a lot of apps out there that could potentially use our solution, few app owners have the budget to pay an outside firm for app security. I couldn’t change the market and I probably wouldn’t have generated the returns my VC expected.
Unexpected elements of seeking venture capital
If you’ve explored the variables your startup is up against and decided that VC funding makes the most sense for your goals and the market you face, it’s time to move ahead and find a VC willing to invest. As someone who has experienced the seed round and Series A round of funding, there are several things that surprised me about the process.
When seeking venture capital process will move quickly.
If your company and pitch involve what the VC is looking for, a decision can sometimes happen in a day. To secure a fast decision, you need to prove to them that you can execute your goals. Also, be sure to provide ROI with access to their resources. Metrics are good, but they aren’t always possible to provide if you’re seeking an angel investor or seed funding and your business isn’t yet off the ground. Ultimately, it comes down to your own personal conviction. A VC’s main goal is to secure a monetary return on their investment. If you can convince the VC that you’re the best thing for their career, you’re sure to hear back quickly.
Suddenly, you’re signing the papers and making arrangements to receive and announce your funding to the public. There’s a new voice with a powerful say in how you run your business. Funding brings massive change to a business, and (like most things in the tech world) the process moves forward rapidly. Don’t get caught on your heels heading into the funding process. Expect things to change at the speed of light and try to hold on when finding investors.
During a seed round of funding, data doesn’t carry much weight because your business hasn’t come to life yet. While it makes sense when seeking venture capital I was still taken aback by how much of the funding decision process relies on “feel.”
According to Scott Kupor, a managing partner at Andreessen Horowitz, the people behind a startup are the most important aspect of feel. In his book, Secrets of Sand Hill: Venture Capital and How To Get It, he writes,
“The fundamental question VCs are trying to answer is this: Why back this founder against this problem set versus waiting to see who else may come along with a better organic understanding of the problem? Can I conceive of a team better equipped to address the market needs that might walk through our doors tomorrow? If the answer is no, then this is the team to back.”
With this in mind, it’s crucial to push your background. Emphasize why you’re equipped to grow this company, especially in the absence of concrete data.
You’ll gain a true partner (if you choose the right VC).
While I was expecting to receive guidance from our VC, I wasn’t expecting the relationship to be a true partnership. Verbit was lucky to gain a trusted advisor in addition to $23 million in funding, and we wouldn’t be where were are today without the direction our VC has provided. Knowing now that this is possible, every startup should set out with the goal of finding the best partner for them.
A VC should help you with key hires, networking, sales strategy and more. They should be both your cheerleader and challenger. If you’re a first-time founder, you may not know to look for these characteristics. Ultimately, these are the traits that will get you off the ground, perhaps even more than the funding itself.
Look into a prospective VC’s past investments and those companies’ growth to make sure they have experience in providing the kind of guidance your company hopes to access. If there isn’t clear evidence they can provide what you need, they’re likely not the right match for your company.
VC funding can turn your startup into a rocketship capable of exponential growth. But for all the change it brings, your experience is only as good as your VC. When seeking venture capital, it’s good to understand what you’ll experience. Understand that as you enter the pitching phase positions you to choose the best VC and partner for your company.
Originally Published in Crunchbase
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