Venture Capital 101 for Startups

Whether you’re an entrepreneur in the phase of bringing your business idea to life or your startup has already taken off the ground, raising money is crucial to your next steps. Venture Capital 101 would give you an idea of what it means.

This is where venture capital come in— funding from investors in exchange for equity in the company. These funds can help bring their startup’s goals to life, and unlike the thousands of dollars that early investments produced, VC funding brings in millions.

Venture Capital Series

Part of the process of raising venture capital is moving through a round of funding from investors. Capital is raised through each of these rounds, with early investors moving into the next series so they can maintain the share they have in your business.

Did you know, Startups in India have raised a record $3.9 billion from venture capitalists in the six months ended 30 June in 2019.

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These rounds are broken down by Series A, B, and C funding which we are covering in these Venture Capital 101 for Startups.

Series A

The first round of financing, Series A, happens when you first decide that it’s time to offer company ownership to outside investors. It’s the first step in getting to the major leagues of venture capital. In fact, Series A funding in 2018 was more than $11 million.

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To do this your company portfolio will need to show that there’s value in your business and what you do. The value of your startup is based on several factors: being able to prove that your business concept is viable, that you’ve seen some success with acquired seed capital and the current market size of your company compared to the rest of the industry. Many investors also look to annual recurring revenue (ARR) as a north star metric to determine if a startup is worthy of their investment(s). While there’s no single indicator that a startup is ready for Series A, passing the $1 million ARR mark is a standard good signal.

Series B

Naturally, once you’ve passed through Series A and need more capital to achieve company growth, you’ll move into the next round, Series B. The main goal of this round of funding is not only to break even but also to see some net profit. And unlike Series A investment channels, VCs put an emphasis on growth rates and historical performance, in addition to the ARR. The factors that go into the valuation of your company during Series B will include how you’re performing in comparison to similar companies in the industry and a forecast of future revenue.

In turn, this means lower risk for investors and higher funding rounds than Series A.

Series C

Venture capital investors will consider Series C funding when your company has shown that it’s successful in the market. You’ll be ready for this round when you’re looking for more acquisitions and a larger market share or if you want to develop more products or services.

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Choosing the Right Venture Capitalist

Once you’ve made the decision to enter the world of venture capital, there are some important factors and best practices that need to be considered.

• Identify and choose the right VC. Do your due diligence by researching the bio of partners in venture capital firms that you’re considering. Consider their background and other startups have they funded? Doing so will help you identify competencies, areas of conviction and investments in other competitors.
• Scan a VC’s portfolio for similar business models regardless of sector. If you’re selling to SMBs and many of the firm’s companies do as well, the VC could be a good fit.
• Narrow down a list of VCs. Not every VC firm will be a good fit for your company. Narrowing down a list will help you when you’re ready to start the process of introduction and pitching your company profile to get the interest of these potential investors.

The “Venture Capital 101 for Startups” here is just the start of what you need to know when your startup is ready to raise venture capital, so Embroker put together this guide to venture capital – geared specifically for startups. It covers important details like pitch deck best practices, how to decode a Series A term sheet, D&O insurance and more.