A Guide To How Venture Capital Funding Works

Impressing a venture capital firm is the dream of every start-up founder. Venture Capitalists who run the venture capital firms are those ‘angels’ who invest money on businesses which have huge potential to be a great player in the market.

Typically, a venture capital investment involves investing funds in return for acquiring stakes in the start-up in the form of equity. The form of investment carries a good amount of risk of losing out on all the money invested if the start-up just does not succeed in the market. As a result, there are extremely few start-ups out of the thousands which apply for funding, and are then selected.

The panel of VC’s contains experienced businessmen and industrialists who typically have experience of working with multiple startups and owning quite a few of them. They can quickly predict if the venture has potential or not and that is why it is extremely essential to have a great pitch ready for them.

This is how a typical relationship with a VC’s work:

  • Business Plan Submission

After the idea has been created, a detailed business plan needs to be created before approaching a VC. It has to carefully describe the gap identified, define the gap, address it with possible solutions and must clearly explain why the start-up contains the best solution. Some VC’s might have their own format for drafting a business plan for their review.

  • Face – to Face Meeting

Once the VC’s shows initial interest in the startup, they call the founders for a face – to face meeting to understand the requirements of both the parties and also to know the project in better detail.

  • The due diligence stage

The due diligence phase is one of the most critical phase for funding. It involves putting the missions acquired from the meeting into action. Fine-tuning the business plan, evaluation of strategies, solving queries from customers and much more constitute this phase.

  • Funding!

The most awaited stage. Once the VC is satisfied with the overall look of the start-up pitch and its work, a term sheet is generated which contains the terms and conditions involved in the funding. Once it is given a green signal by both the parties, funds are generated.

Although the process of acquiring funds through VC is quite a complex process, it is a source of extremely valuable insights and technical resources to make the business frame even better. They bring in a mixture of wealth and experience into the system of the company which can only help it realize the potential which was once dreamed of.

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