Starting in the 1990’s raising capital for tech startups became ubiquitous in the venture capital community. The early Internet ventures, some of which led to the Dot Com Bubble, raised money at a fever pitch. The high failure rate started a movement to a more accurate investment model by VC Firms. The earlier approach of throwing mud against the proverbial wall just didn’t produce an overtly successful model; nevertheless, companies like Amazon.com, Google, and Facebook, have thrived. All of these companies received venture capital, and Facebook, has a documented paper trail of it’s very first investment, whereby, a very bright young man, by the name of Mark Zuckerberg, actually completed his own Regulation D Form D, for an investment of roughly $5,000; however, his next few capital raises involved much more complexity, and much higher investment amounts.
As the landscape has gotten more saturated with competition VC’s have tightened their processes even more; for example, VC’s now typically specialize in specific industry sectors, such as, software, mobile devices, biotech, digital media, etc. They have also started specializing in different stages of the investment cycle, e.g., early-stage seed rounds, Series A rounds, etc. VC’s also tend to invest geographically, including Austin, TX, Silicon Valley, Seattle, WA, etc.
Obviously, one needs a business plan to begin the process, but that’s just the starting point. You’ll also need a Pitch Deck, a pre-written Term Sheet, or a Private Placement Memorandum with a Subscription Agreement attached. This process is time consuming to say the least, but if done properly can yield some earth shattering results. One of the key areas to focus on is the section regarding ‘what sets you apart from the competition.’ Obviously, VC’s are looking for something that will disrupt a marketplace, and the Uber’s of the world have set a standard for preconfiguring the disruptive legal costs of fighting long drawn out litigation, on multiple fronts. Setting yourself apart, while also detailing exactly how your product or service will reap a profit is going to bode well when giving a presentation.
The next thing to nail down is your management team. It has always been a rule of thumb that VC’s typically invest in ‘people,’ rather than ideas, but that doesn’t mean your idea can be lackluster; however, your management team needs to be strong. If you’re a first-time entrepreneur and your management doesn’t have the prowess to take the company public, or grow it exponentially, then it would be wise to approach the VC firms who want a hands-on management role. Their experience and resources are invaluable and may actually increase the possibility of raising a second, or third, round of financing from other sources, at better terms.
While startups have very little actual value, apart from their intellectual property, you’ll need to preconfigure a ‘pre-money’ and ‘post-money’ valuation. This is a negotiable area, and there are many schools of thought surrounding the methods used for this section; nevertheless, VC’s will likely use this as a bargaining chip. Moreover, figuring out an investment structure, along with an exit plan for the VC, as well as the management team, are also vitally important. Having this area predetermined will give you a distinct advantage.