How to raise funding from Venture Capitalists (VCs)?
How to think from VC's perspective? What are their priorities?
Like entrepreneurs investors are also running a business and have a responsibility towards their LPs (Limited Partners) whose money they're investing.
Just like an entrepreneur goes out pitching his startup, in most cases investors also raise funds from other LPs (such as university endowments, sovereign wealth funds, rich individuals, family offices and more).
Investors simply charge a fund management fee (usually 2%) and success-fee in the form of carry (usually 20%) from fund's returns.
It's important to understand that their priorities and timelines may not necessarily be aligned with a founder's.
Are you ready for VC funding?
Ok, so you've decided to raise funding ー great!
But that's just the easy part; just because you think you need money doesn't mean someone is waiting on your doorstep with a chequebook ready to sign.
Fundraising is an extremely painful experience for most first-time founders especially when they don't have any insights and network in the industry.
Before you even begin the process, take this assessment to see if you're ready to raise. Taking this assessment now will save you tons of time and agony later on.
If your fundraising assessment score is between:
Score 75-100 ー Highly likely to raise funds
Score 50-75 ー Very challenging to raise funds
Score 25-50 ー Highly unlikely to raise funds
Purpose of this assessment is to merely help you evaluate your readiness based on factors that investors like to review. Of course it's an oversimplified version and there's lot of nuance on a case by case basis. Please use this assessment only for guidance purpose.
What are VCs looking for in entrepreneurs?
Each and every investor is looking to invest in the next unicorn. They all want a pie of the next Facebook or google. But how most investors approach an investment is no secret to anyone. At the end of the day, most investors are looking for key ingredients that in the their view make or break a startup.
Investor assessment score is 55
Score 75-100 ー Highly likely to invest
Score 50-75 ー Very difficult to invest
Score 25-50 ー Highly unlikely to invest
How much should you raise? And how much should you dilute?
Raising too much early on can really mean diluting too much of your company and putting unnecessary pressure on entrepreneurs to justify their success. Raising too little sometimes mean the product won't see the light of the day depending on the nature of the market.
So what's the right amount?
Well, the answer lies in detailed financial planning of your idea. Instead of a made up number, it really should be driven by your planned business initiatives. Granted it may vary as you go along but having a direction can help you stay focused and provide clarity on the resources you need to achieve your goals.
This is usually the dilution % I recommend at various stages.