It has been an interesting period for the startup ecosystem. The year 2021 saw an incredible 10x increase in venture funding compared to the last decade. However, 2022 witnessed a gradual decline, primarily due to the fear of recession. Despite the slowdown, venture capital-backed companies received an investment of $44.1 billion in the first quarter of 2023. This is a 37% increase from the last quarter of 2022. Even though funds have declined, resilient startups can still raise huge investments with the right product, investment deck, founders’ background, and other factors. This blog guides understanding how funding a startup works and the best way to secure investments.
What is the Difference Between Venture Capital and Angel Investments?
Venture capital and angel investments are the two most popular ways of funding a startup looking to scale its business. However, entrepreneurs often confuse these two methods of raising funds. The differences can be encapsulated in the following points:
- To begin with, venture capital investments are made by a firm that pools money from organizations, firms, or individuals. On the other hand, angel investing is done directly by high-net-worth individuals
- In general, because of their large size, venture capitalist firms can offer a large sum of investment and a wide range of expertise. Angel investing usually involves a smaller investment amount
- Therefore, angel investments are more suited for early-stage startups. Meanwhile, big startups with several years of experience can seek venture capital investments
How to Prepare a Successful Investor Pitch for Venture Capitalists or Angel Investors
An investment deck or pitch is a crucial part of an investment round. The slide presentation comprises brief yet relevant details related to the business idea. Moreover, it includes mission and vision, market size, product features, growth plan, background of the founder, and other details. To sum up, it gives an overview of the business and why investors should invest in it.
Here are some key steps to help you prepare investor pitches for funding a startup:
One of the best ways to deliver an investor pitch is to leverage the art of storytelling. Entrepreneurs need to weave a compelling story about the market problem they’ve identified and how their product attempts to solve it. Hence, building a narrative around the product and its relevance to the market is important. Also, explain the ideas and vision of the founder.
Be Ready With an Elevator Pitch
An elevator pitch is a quick 30-second pitch to be given to the investors. It includes a summary of the market problem, the solution the startup offers, and the business’s core values. It is essential to be prepared with your quick elevator pitch so the investors know what to expect from the in-depth presentation.
Prepare a Revenue Model
A revenue model gives investors an accurate idea of the startup’s growth plan and allows them to make faster decisions regarding funding. Therefore, when funding a startup, make sure to include a detailed plan on how to monetize the product, its initial price, and various subscription plans.
Apart from the above, you can master investor pitches by proposing your business idea to multiple investors. However, keep the most promising investor for last. This will help entrepreneurs gain experience in answering questions and communicating relevant information.
What are the Typical Terms and Conditions Associated With Venture Capital Funding?
This refers to the amount of equity shareholding or ownership the investors will receive in the company in exchange for their investment.
Valuation is a company’s financial value based on its profits, assets, and goodwill.
This is a clause investors add to shareholder agreements to protect their ownership if the startup seeks investment from other parties.
Venture capitalists often use these clauses to restrict startup founders from setting up a competing business during and after receiving an investment.
This refers to an exit plan for the investors, such as an IPO or acquisition, to realize their returns.
How to Find and Approach Potential Venture Capital Firms or Angel Investors
One of the biggest hurdles before receiving investment is finding and reaching out to potential investors to secure investments. Here’s how to do it:
- First, create a long list of angel investors or venture capital firms. You can do this by conducting market research or joining startup communities or groups dedicated to information regarding funding a startup
- Next, conduct further research to check their previous investments, what industry they prefer, or other requirements on their website
- Third, shortlist a few investment firms or angel investors for funding a startup based on your requirements
- Fourth, send cold emails or LinkedIn messages to reach out to potential investors along with pitch decks
- Last but not least, make it a point to attend various networking or funding events to find potential investors
What Factors Do Venture Capitalists and Angel Investors Consider When Evaluating Startups
Background of Founders
Do investors bet on the jockey or the horse? To be clear, ‘horse’ is the metaphor for the company or the startup, while ‘jockey’ refers to the founders who guide the company and strive to make it win. A Harvard Business Review survey suggests that 95% of venture capital firms considered the capabilities of the core founding team before investing in a startup. In other words, before funding a startup, investors usually evaluate the founders’ knowledge, skills, personality, integrity, leadership, and determination to assess whether they can make the company grow.
Investors generally ask the following questions: Does your product have a competitive edge? If a similar product exists in the market? Is it scalable? What is the product’s Unique Selling Proposition (USP)? Needless to say, investors get excited about funding a startup when you show them the product’s growth potential.
In addition to the product, investors also place importance on the market. Here, market refers to the audience or consumers willing to purchase your product and how much revenue the company can generate. Therefore, even if the product is unique, the chances of receiving investment decreases if it does not have a large market size.
Commonly referred to as ‘valuation’ in the startup parlance, this is another critical factor for funding a startup. It is necessary to calculate how much the angel investors or venture capitalists invest in the capital in return for a certain percentage of equity or ownership of the company. More often than not, investors consider both tangible and intangible factors for determining the valuation of a startup.
Lastly, venture capital firms and angel investors also give significant thought to the company’s existing investors. This is because every investor has terms and conditions and operates in a certain manner. Sometimes, a startup can have many investors holding a significant portion of equity ownership in the company. This decreases the chances of others funding a startup.
Enrich Your Entrepreneurship Knowledge with Emeritus
The global market is witnessing a massive entrepreneurial wave, especially in the last few years. According to the Global Entrepreneurship Monitor (GEM) Report, entrepreneurial activity in the U.S. increased to 16.5% in 2021 from 15.4% in 2020. This growth happened despite the economic slowdown during the pandemic. However, it also explains the intense competition faced by startups. Therefore, entrepreneurs must learn new skills and technologies to innovate and find investors keen on funding a startup. To help them along, Emeritus offers entrepreneurship courses that will sharpen their abilities and enable them to create winning ventures.
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