Startup funding – Why VCs are still such a great bet

Possibly the most difficult phase of running a startup is the one where it has progressed from seed funding to Series A funding. This is where VCs (Venture Capitalists) enter the fray. Usually VCs are well-to-do investors, banks & other such financial institutions. What they have to offer need not always be monetary.

These VCs can come on board for their technical and/or managerial expertise even. Today there are hundreds of venture capital firms that all offer funding to new and innovative startup ventures. Before investing in a particular enterprise Venture capitalists look at factors like how well the operations are managed, a full fledged business plan and potential for growth in the near future. Once the VCs have thoroughly evaluated the startup on all parameters that they consider important the investing individual or firm provides funding in return for equity.

This whole process is usually triggered off by the entrepreneur or startup business owner submitting a detailed business proposal to either a venture capital firm and in some cases an angel investor. A common practice among angel investors who get involved in the funding process is co-investing where they invest alongside other angel investors who might be known to them or even trusted associates.

The capital provided to these startups by VCs and angel investors does not all happen in one go. It is provided in stages (read rounds) where investors ensure that certain goals are met by the startup before a fresh round of investments are again made. These rounds are usually termed as Series A, Series B, Series C, Series D and so on. Each one has it’s own role to play in the overall scheme of things.

As is normally the case seed funding has to do with a small amount of money that helps it develop what was a concept into an actual product, or at least a working prototype. Once this product is ready to be showcased in the marketplace an entrepreneur will approach VCs to provide what is called Series A funding. On their part the VCs examine the product and it’s potential in the market before deciding to fund your startup.

Again this will be in exchange for a stake in the company and this amount will be significantly larger than the initial seed money. Then you have Series B round of funding where you have seen a good response to your product and want to take it beyond the local markets.

After which comes the Series C funding that is usually to create a global presence for your product or even diversifying it for different markets. So if all goes well your startup business will move from seed funding to Series C (or even Series D) in a matter of five or six years.

Coming to the reality check, you must understand that each time you bring new investors on board you are giving up a sizeable percentage (20% and upwards) of your company to that person/firm. Yes the valuation of your business grows with each round of investments which is great news but after a certain point you will have little left to offer.

Talking of valuation it is critical that you negotiate smartly with the investors so that the best interests of your company are kept in mind at each step of the way. Without which all this effort made to receive funding can come to nought. With both financial and legal implications. The valuation done before the received capital gets added to the balance sheet is pre money valuation. And after adding them it is post money valuation.

While post money valuation can be simple and uncomplicated pre money valuation can lead to disagreements between you and your investor, if not done right. So p-roceed with utmost caution and a proper understanding of matters. After all it is your company.

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About the Author: Debutalk

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