How to raise Venture Capital

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Understanding VC Funding

Venture Capital is all about the risk reward ratio: the aim is to take a large bet on a venture which can deliver an exponential return within an investment cycle.

You’ll often hear the 10 x return within 5-10 years as the key mantra.

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VC funding involves large investments with the expectation of significant returns, typically 10x the initial investment, within a set timeframe. This model often requires multiple funding rounds, diluting founder equity with each round. Typically, during each funding round the investors [VCs and maybe others] will require 25% stake for that round - an arrangement which, while lucrative and providing the business with (hopefully) large sums of capital, will also leave founders with a reduced ownership stake in the business - an ownership stake which will reduce further the more funding rounds are secured.

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In essence, we would say that VC money is often seen as a gravy train. The unspoken truth (and one that is at times unpopular to say) behind the VC model is that  the VC model often requires your business to be capital intensive - that you’re going to do lots of funding rounds in order to chase a very big return. As of Q2 2024 where a market correction is occurring, the common observation about VC-led ventures and the VC funding landscape is that there is relatively little focus on medium-term profitability and revenue generation with the sole focus being to chase the large exit (i.e. quickly moving from the SOM to the SAM to the TAM).

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In summary, the VC model assumes you’re going to be a capital-intensive business, that chases an incredibly large exit and/or monetisation opportunities, and requires a 5 year (often 10 year) commitment in terms of point-to-exit, of which you may not have a large stake in the business by the time you get to this point of exit - you as a founder need to decide whether you want to take this bargain.

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Take Uber - they took loads of funding to subsidise the rides in order to win market share, with the hope of eventual monetisation of said market share, or public listing. This is the classic VC model, working towards making a large gamble pay off. Interestingly, now that Uber has (1) obtained market share; is (2) no longer desiring new capital, and (3) incumbent investors are expecting a return on investment (ROI) the rides have become more expensive as the subsidies have run out.

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Is VC Funding Right for You?

While every business is different and you will have your own particular considerations to take into account when deciding which route to pursue, the following are a reasonable set of questions to bear in mind when deciding whether to go after VC money:

Are you ready for a 5-10 year journey with VCs as influential stakeholders, potentially impacting your autonomy as a founder? Accepting VC money means accepting that they will expect to have influence over the direction and trajectory of your business - and so will the people who are investing in them. Don’t forget that VCs are in turn responsible to their own investors, who will have their own interests and priorities to pursue.

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Does your business model align with the VC's need for a high-growth, high-return exit strategy? Are there comparable businesses that have successfully delivered VC-friendly returns? If there aren’t, and you’re creating the first business of this kind, what are the characteristics that you share with other businesses that have succeeded in delivering the VC-friendly return?

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Are you willing to adapt your business to prioritise rapid growth and financial returns over other objectives? This is in many respects the biggest question of all, and one which is perhaps more emotional than empirical  - but it’s a crucial one for founders who may be considering taking VC investment.

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Raising investment is hard. Raising Venture Capital can often feel even harder and comes with a number of strings attached. You need to make a personal and analytical decision about right VC money is for you.

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How to Find Your VC

From our experience, being “part of the scene” is paramount and obtaining introductions is helpful. Would you recommend a bad restaurant, for example? That’s the utility of a solid intro.

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Presuming VC Funding is right for you, then how do you go about getting in front of these investors in the first place?

It’s a cliché to say that the tech world is built on networks - but clichés are often firmly based in reality, and this is one such case. The sad reality is that, no matter what anyone says, this really is a network-driven industry. Being known in a scene and getting personal introductions really does help, and being recommended to investors by people they know and trust is the best way of securing an ‘in’.

We know that this is a controversial statement - lots of VCs say they are trying to change this, trying to be more diverse and working hard to find founders and companies outside the ‘usual’ tech circles, but the end results we’ve seen haven’t always demonstrated real change no matter the very real efforts they ARE making.. VCs still have a tendency to invest in certain types of people (often with certain types of financial backgrounds) - and this means networks matter.

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Of course, the mere fact of ‘getting networked’ and ‘achieving meetings’ doesn’t, on its own, mean you’re on your way to securing that VC cash.  It’s important to be aware of the way in which VC operates, and the way in which their due diligence processes work - after all, one of the key indicators of a VC’s skill is their ability to be selective when picking investments based on the information available to them. One of the ways they acquire this information is by meeting founders, often multiple times, to develop an impression both of the business and of the individuals behind them - bear in mind that multiple VC meetings can on occasion simply mean that said VC is building a case as to why they won’t, in the end, be funding you. 
What’s important is making the meetings count.

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How you choose to build and develop this network will in part depend on where you are and your own personal style; you might want to consider becoming part of an accelerator in order to benefit from the network effect that they naturally possess (in the interest of full disclosure, Daedalus is a sponsor of Hotbed, and the CEO is a mentor at Zinc and Antler both incubators and early-stage investors. Or you just need to “get involved” and go to the meet ups and become part of “the tech scene”.

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The Investment Process

To help convince a VC that you - and by extension, your business - are worth investing in, you will need, at minimum, the following documents to make your case.

A concise overview of your business to pique investor interest. This should be one page (One pager) or 2-3 very brief slides (Teaser). You want to  succinctly explain what you are doing, why and how, in order to build excitement and interest and to whet the appetite for the full pitch deck.

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A compelling 10-12 slide presentation showcasing your company's value proposition, market opportunity, and growth potential - this is the document which sells your company as an attractive investment. Ideally it should explain the size of the opportunity, demonstrate that your business is solving ‘a problem worth solving’, explains what the product is, what the money will be used for, how it will contribute to growth - and, of course, how you will achieve that magical 10x. The importance of a good - and concise! - pitch deck with a clear, distinct vision and story, cannot be overstated - VCs can see 50+ pitch decks a week, some up to 30 slides long, so you need to be clear, compelling and distinct.

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A five-year plan detailing your investment strategy, revenue projections, and path to profitability over the coming 5-10 years.

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Not super standard, but something we benefitted from in our own raising efforts. This deck is a comprehensive document providing deeper insights into your business model and technology. This will become longer and more complex the further along you are in the journey, becoming less about the broad idea and more about how you specifically are approaching it and working to make it scale. Ideally you’d align this to the investor’s own Due Dil process

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Less is more. VCs see 100s of investment cases a day and review copious amounts of decks and models. Your materials need to stand out from from the crowd and make a lasting impression... quickly.

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How to Close VCs

This whole exercise is all in service of the ultimate goal - the investment committee (IC) meeting, in which you your venture is presented to the rest of the rest of the partners at the VC firm who will ultimately decide whether to invest in your business or not.

While all funds are different, and their processes  follow their own rhythms, the following tips are worth bearing in mind when preparing:

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Answer questions concisely and focus on the information investors seek. These are busy people, so ensure that everything you say in the time you have with your investors(s) works to demonstrate why and how an investment in you and your business will deliver the return they need.

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Craft a compelling narrative that highlights your problem-solving capabilities and potential for high returns. You don’t need to be the most charismatic person on earth, but you do need to be able to explain clearly and cogently what it is that you are doing, how it is going to solve the problem you have identified, and how that is going to deliver the required returns on the required timescale.

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Remember your value and respectfully assert your position in the conversation. This isn’t about being arrogant or domineering - just remember that you are in this meeting because these investors think you are potentially valuable, so don’t undersell yourself!

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This is hard to remember, but be patient and accept that you will often need to present and talk about the same information a number of times whether that be to team members within a fund or to folks across different funds. Even if it’s the thousandth time you’ve presented the Problem and Solution slide and you’re bored/jaded; this is the first time the other person may be hearing this and you need to maintain excitement.

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Ensure all team members are prepared and aligned in their message, and that during meetings everyone has a role to play and a clear value-add; bringing people to the meeting who seem to have nothing to contribute smacks of inefficiency, which is something of a red flag.

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Understand the VC firm's investment focus and tailor your pitch accordingly. Don’t assume familiarity with your problem space, your niche or the specific vertical you are targeting.

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Your interactions with the VC so far should have convinced at least one partner at the firm that you are worth investing in. This partner is often referred to as your Lead Partner or your Sponsor and they effectively function as your ‘champion’ within the IC meeting. The Lead makes the case for the investment, while the rest of the investment committee will decide whether you merit the money and whether you fit within the wider portfolio of businesses they are funding.

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Raising and closing VC can often feel like a slog and you’ll inevitably receive a lot of rejection along the way ... even if you get to the IC stage. Try as best as possible to be patient, strategic and focused despite the “noise”.

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Your venture is your baby, the VC is akin to the Kindergarten teacher. Your baby is special and precious to you, but it’s just yet another baby for the VC so you need to convince them that yours is truly special.

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Alternative Funding Options

What, though, if you decide that the VC route isn’t the right one for you? Thankfully there are several other options you can pursue to secure funding for your business - the following are a few of the most common routes:

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Individuals or small groups investing personal capital, offering varying levels of involvement and return expectations. There tend to be two types - Angels aligned to the VC model, who will expect the big ticket return, and those who are looking for a different type or timescale of monetisation and capital extraction. The latter type of Angel may offer more operational expertise and guidance, and may try and get involved more in the business - for good or ill.

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Bypass VC funds and approach limited partners directly, a challenging but potentially rewarding option. The hardest part is developing the connections with these high-net-worth individuals, funds etc, but brokers do exist who purport to offer these services; they tend not to come cheap, though, so bear that in mind when considering this approach.  Requirements for direct investment will necessarily be different - and occasionally more beneficial.

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Public funding options, often paid in arrears and requiring specific criteria. Depending on the type of business you are building, or sector you will operate in, it’s possible that there might be some public funding available - the UK and EU both have various options available across a variety of different areas of business operations. It’s important to bear in mind that, while grant funding can be lucrative and has significantly-fewer equity implications than VC or Angel funding, the way in which money is distributed (quarterly, often in arrears) can have equally-significant impacts on cash flow.

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Self-fund your business through revenue generation. If that means that you need to keep working and only do the business evenings and weekends, so be it. No one said this was easy.

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VC funding often looks attractive, but is very hard to obtain and luck does play a part. Actively pursuing alternative routes may save some time and still get you the cash you require in a similar timeframe.

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A number of ventures have successfully leveraged a crowdfund and initial debt into revenue, scale and/or VC funding down the line.

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Raise capital directly from potential customers, suitable for certain business models. There are a multiplicity of crowdfunding platforms - examples include Seedrs, Crowdcube, etc - all of which have pros and cons.

You are going direct to potential customers, especially if you’re a retail or Direct-to-Consumer business; the barriers to investment are necessarily lower due to the smaller sums you are seeking from each investor, as is the amount of effort required to convince investors of your worth; part of the process is PR (attracting investors), so you’re drumming up a customer base and investor base at the same time.

Given each investment you are attracting is significantly smaller than a lump-sum VC cash injection, you will need to find significantly more investors to achieve the same funding goal;  keeping 500 investors happy is very different from keeping 2-3 investors happy; crowdfunding can often require a high administrative burden, with a significant degree of paperwork and complication; finally,  there’s a financial cost to crowdfunding as each of the platforms through which investments are administered will charge a per-investor fee.

While crowdfunding isn’t for everyone, for certain types of business (for example, selling products under £100), it can work very well indeed - but if you’re more of a B2B business then it’s maybe not for you.

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Final Thoughts

Whatever funding route you choose to pursue, it’s important to remember these two things above all.

Establish a firm timeline for securing funding to avoid depleting resources. It really is as simple as this: “By date X I will have either closed a funding round, or not closed a funding round, and then I will move on - in whatever direction makes sense”. Without this fixed deadline you will simply find yourself burning through your existing budget in search of more money without making any significant progress on your product - which is unlikely to get you anywhere.

Consider debt financing but please understand the associated risks and costs.

Choosing the right funding path is a crucial decision for your company's future. Carefully evaluate your options, align your decision with your long-term goals, and don't hesitate to seek expert advice.

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