How to Get Venture Capital Funding For Startup

Abstract
Venture capital (VC) is a type of private equity. It’s a form of financing that is provided by
firms or funds to small, early-stage, emerging startups that are deemed to have high growth
potential, or which have demonstrated high growth. Venture capitalists take on the risk of
financing risky startups in the hopes that some of the firms they support will become
successful in future and in this process VC firm will get multiple times return on their
investment. The purpose of the study is to understand how an entrepreneur can get venture
capital funding for his startup. An entrepreneur journey starts with an idea but when his small
business gets off the ground; capital is required to fuel the growth. Venture capital has
remained stable source of money to nurture startup. Venture capital financings are not easy to
obtain or close. Entrepreneurs will be better prepared to obtain venture capital financing if
they understand the process, the anticipated deal terms, and the potential issues that will
arise.

Introduction to the Study

Venture funding is not meant to be long term funding. The central idea in such funding is to
insert investment in an organization’s balance sheet and also infrastructure till a
predetermined size and market credibility is reached so that is can be sold to a larger
corporation and public-equity markets can get into the action and generate liquidity.
Essentially, a venture Capitalist would purchase a stake in an entrepreneurial idea and nurture
it for a short duration ending in an exit with the aid of an investment banker. Putting things
simply, the big challenge here remains to progressively earn a superior return on investments
in what are inherently risky business ventures.

The Five Steps to Getting VC Funding

So you’ve decided VC is the right financing channel for your company, and you think
your company is mature to pursue it. Now you need to understand and prepare for the
enough funding process. As a business founder, you’ll likely go through five steps on the
path to VC funding:
1. Idea
First of all, you need a great business idea. But as we’ve mentioned, not every business
is right for a VC investment. Venture capital firms invest in specific kinds of companies:
typically early-stage, highly-scalable businesses that can grow fast, dominate a market
and go public through an IPO. If you want VC money, you’ll have to ensure your business
fits this bill; otherwise, a different type of financing is your best bet.

2. Pitch Deck
A pitch deck is generally the first piece of marketing collateral you will share with a VC
firm. A pitch deck can be cold-emailed to a firm, but the best-case scenario is to get a
warm intro, which is when someone from your network introduces you to the VC. Early-
stage pitch decks are often conceptual and idea- based, whereas decks for later stages of
funding are more complex, featuring KPIs such as engagement, traffic or revenue.

3. Meetings
To secure financing for your business, you need to meet with VCs. Cold-emailing your
pitch deck to VCs is a potential way to score a meeting. However, you’ll be much better off
utilizing your network. To find the best fit, create a target list of VCs that align with your
business. CB Insights offers an extensive database of firms that you can search to find
financiers in your industry. Then, use your network for referrals to get in touch with VCs, or
do cold outreach as a last resort. The timeline for getting a meeting is different for
everyone. If you have a hot idea and a network of business people with direct VC
connections, it’s possible to get meetings set up within a few weeks.

4. Due diligence
If your first meeting with a VC goes well, there will be additional meetings—the exact
number varies greatly and a series of due diligence steps before a VC offers a deal. According to
Micro-Ventures, an equity crowd-funding investment platform, most VCs take a phased due
diligence approach. Due diligence includes reviewing the founding team, product, industry, target
market, company earnings power and financial viability of the company. No matter how
“done” your deal seems, the due diligence phase is necessary for all venture capital firms.
The firm will take time to fact-check all important data and assess current assets alongside
any potential risks, eventually determining whether the deal is a good fit.
5. Term Sheet and Funding
If a VC wants to finance your company, they will send over a terms sheet that lays out the
details of the proposed deal. The terms sheet is a negotiable document that both parties must
agree upon. After finalizing a terms sheet, the company will receive funding. These five
steps are the general process of securing funding from a VC. It’s not always a straight line to
funding, so come prepared and remain persistent during the process.

Things to consider before raising VC Fund

Venture capital financings are not easy to obtain or close. Entrepreneurs will be better
prepared to obtain venture capital financing if they understand the process, the anticipated
deal terms, and the potential issues that will arise. An entrepreneur should consider the
following things before raising money though venture capital fund.

Valuation of the company

The valuation put on the business is a critical issue for both the entrepreneur and the venture
capital investor. The valuation is typically referred to as the “pre-money valuation,” referring
to the agreed upon value of the company before the new money/capital is invested. For
example, if the investors plan to invest $5 million in a financing where the pre-money
valuation is agreed to be $15 million, that means that the “post-money” valuation will be $20
million, and the investors expect to obtain 5/20, or 25%, of the company at the closing of the
financing.

Build a pitch deck and presentation

If you're hoping to raise money from a VC, a solid pitch deck will be your calling card and
the starting point of most introductory meetings. A pitch deck is a presentation that provides
an overview of your business. The deck can share insights about your product or service,
business model, market opportunity, company funding needs and your management team.
A pitch deck should be short, concise and cover the following elements:
Management team
Company progress
Investment amount
Company financials
Protective Provisions/Veto Rights of the Investors
After a financing is completed, venture investors will often hold a minority interest in the
company. But they will typically insist on “protective provisions” (veto rights) on certain
actions by the company that could adversely affect their investment or their projected return.

Composition of the Board of Directors

The makeup of the Board of Directors of the company is important to venture capital
investors as well as to the founders. VCs, especially if they are the “lead” investor in a round
of financing, will often want the right to appoint a designated number of directors to be able
to monitor their investment and have a meaningful say in the running of the business. From
the founders’ perspective, they will want to maintain control of the company for as long as
possible.  

Liquation Preference of the Preferred Stock

A “liquidation preference” refers to the amount of money the preferred investor will be
entitled to receive on sale of the company or other liquidation event, before any proceeds are
shared with the common stock. VCs insist on a liquidation preference to protect their
investment in “downside” scenarios; for happier scenarios in which a company is sold for an
amount that would generate big returns for the investors, investors can always convert to
common stock.

Find the right VC to fund your business.

All venture capital firms have a specific focus regarding the types of companies they fund:
They might invest mainly in software, consumer products, fintech, green technologies, AI or
any other category of business. And each firm focuses on different stages of investment
(seed, early-stage, Series A, Series B, Series C and so forth). Thus, the first step in reaching
out to VCs is research. Once you’ve got a target list of VCs to approach, it's time to set up
meetings. You have two opportunities to make connections: an intro from someone in your
network or a cold email to a VC partner.  
Be at the Right Stage
The average age of a company receiving funding is around four years. The odds of receiving
a deal after eight years are virtually zero. VCs look at both growth potential and risk. If
you're too early, you may have high growth potential, but there's also a higher chance you'll
fail. If you're too late, the fear is that you've exhausted your potential for fast growth. VCs
are looking for the sweet spot where you've established yourself enough to be a relatively
sure bet without having fully exploited your market.

Review the Term Sheets Carefully

As you move into the later stages of a venture capital deal, the VC will present you a term
sheet with containing the full terms of the deal. This goes into the small details beyond how
much of your company they'll own and how much they'll invest. Think of it like the fine print
when you're buying a car but with much bigger consequences.

Vesting of Founder Stock

Venture investors will want to make sure that the founders have incentives to stay and grow
the company. If the founders’ stock is not already subject to a vesting schedule, the venture
investors will likely request that the founders’ shares become subject to vesting based on
continued employment (and then become “earned”). Standard vesting for employees is
monthly vesting over a 48-month period, with the first 12 months of vesting delayed until 12
months of service are completed, but founders can often negotiate better vesting terms.

Redemption Rights
Occasionally, VCs request a provision allowing them to cash out of their investment through
a redemption feature (assuming the company has the cash). A typical redemption provision
would say that the investors may, by majority vote at any time starting five years after their
investment, elect to be redeemed (repurchased at their original purchase price), with
payments made over a three-year period in equal installments. Redemption rights are
uncommon, and even in the rare case where they are put in place, they are almost never
triggered—but they can give leverage to a VC that wants liquidity.
List of Active Venture Capitals in India
Here is a list of top venture capital firms in India.
1. Helion Ventures
One of the biggest and most successful Venture capital firms in the country is Helion
Ventures and which has invested in over 75 start-ups while making 110 deals until now. It
runs a company worth $605 (US) which is roughly equal to 4021 crore INR. This is an India
focused company which invests in outsourcing, Internet, mobile, healthcare, financial
services and education sectors and domains. When it comes to exits, its biggest portfolio
companies include Makemytrip, along with taxi booking service TaxiForSure and bus
booking service RedBus which were later acquired by Ola the cab service and Naspers Group
respectively.

2. Blume Ventures 
This VC firm was launched in December 2105 with a $30 million (US) (approximately to
201 crores rupees) fund and has gone on to invest in 83 start-ups and 105 deals so far. Its
investment portfolio is diverse and is filled with portfolio companies like event booking
platform  Explara, warehouse automation player  GreyOrange, and also hyperlocal delivery
service Roadrunnr.  Blume has had around a dozen exits so far for example IndianStage
which was acquired by Explara, 1Click which was acquired by FreshDesk and Promptec
which was acquired by Havells.

3)  Indian Angel Network

Indian Angel Network is a platform (not a VC) which has a network of over 400 angel
investors in the country, and has made 92 deals so far across the globe, investing in 88
companies since its inception in 2006. Since this is a network platform for angel investors as
opposed to a single VC firm, this has a wide spectrum of portfolio companies and angel
investors alike. Styledotme the fashion wear enterprise, rankjunction the online education
firm, hashcube, the gaming enterprise are just some of the portfolio companies which have
benefitted from this platform.
4)  Kalaari Capital
This is a Bengaluru-based VC firm that has funds amounting to a total of $650 million (US)
(4,732 crore rupees). Its high priority portfolio companies include e-commerce giants
Snapdeal, and Urban Ladder along with e-learning company Simplilearn and personal
assistant app Haptik. Its most notable exits in India are Myntra which was acquired by
Flipkart, and the mobile video delivery platform Apalya acquired by Arre, a digital media
brand.

5)  Sequoia Capital

Sequoia capital has the unicorns of IT industry under its portfolio. This firm has invested in
companies like Dropbox, Truecaller, Freecharge, BYJU’s, JustDial, Zomato and many more.

Conclusion
Venture Capitalism is a new breed of industry that is gaining momentum all throughout the
world. The motto of this industry is to heavily invest in initial growth phases of companies
and reap high profits in the short run as the company grows rapidly. This unique business
model has the potential to create employment on a global scale by supporting the employers
themselves leading to an all-around win-win situation. If you are a start-up and looking
for VC money, now is the right time to spring into action!