4 Mandatory First Steps Before Asking for Venture Capital Funding

Kareem Elsirafy

Jan, 27, 2020

The entrepreneurial spirit is often noted for its ability to imbue aspiring startup founders with a unique mix of energy, creativity, enthusiasm, and unbridled optimism for the business idea they have developed and intend to bring to life. The same qualities responsible for helping so many entrepreneurs enjoy remarkable success throughout the course of their professional career, however, may sometimes cause entrepreneurs to rush headlong into founding a business without first developing a comprehensive plan for navigating the earliest stages of a venture. 

 As an entrepreneur and organizational architect, I have had countless opportunities to assist startups, independent initiatives, and even seasoned companies in creating specific strategies designed to account for the kind of details that are sometimes overlooked. Over the years I have noticed that startups yield tremendous benefits by following several specific steps before seeking venture capital funding. The four steps outlined below represent the most critical components in developing an effective approach for securing venture capital funding for a new startup venture. 

Understand Market Size and Determine Appropriate Funding Sources 

Venture capital firms have very specific expectations in terms of the return an individual investment will yield, which is why these firms evaluate each opportunity according to its potential to generate a return substantial enough to be considered worthwhile. Startup founders have to take great care to identify the size of the potential market in which they will be operating before asking firms to consider making an investment. 

There are funding options available for all market sizes, but venture capital firms rarely consider an investment in a startup unless it possesses the capability to tap into a market large enough to generate a substantial return on the firm’s initial investment.

Develop a Targeted Approach for Potential Venture Capital Partners

The amount of funding being sought will go a long way toward narrowing the number of potential venture capital partners available to a startup, so every founder should be keenly aware of the specific firms most likely to partner with a startup seeking a specific level of funding. Startups seeking relatively limited funding would be best served by targeting the micro VCs most likely to be interested in an investment of $1 million or less, and it is likewise helpful to be aware of each firm’s ability to deploy capital based on the pace and process with which the firm tends to operate. 

Ask the Right Questions of Potential Venture Capital Partners

Most venture capital firms will continue to host meetings with startup founders even in circumstances in which there is no longer any capital currently available in the fund, so it is up to the founder to uncover as much information as possible to ensure the process of securing funding is as efficient as possible. The simplest and most straightforward strategy involves asking questions of each respective firm regarding the firm’s usual funding cycle, the number of investments they deploy on a quarterly (or annual) basis and the number of investments made thus far. The answers to these questions, along with a bit of additional research, will go a long way toward illuminating the likelihood that a firm has already depleted its fund and is now in the process of raising funds for the next funding cycle. 

Create an Effective Networking Strategy and Work to Mitigate Any Perceived Risks

Successful investing requires a solid risk-mitigation strategy, and one of the most common approaches favored by venture capital firms includes limiting access to only those capable of leveraging a network to secure an opportunity to meet with the firm. Startup founders referred to a firm by a trusted member of both parties’ professional network reduces the perceived risk associated with the potential investment, particularly when the referring party is so energized by the concept that they actively connect the founder with the firm for a meeting. This requires an effective networking strategy that builds ample potential network connections as well as an overarching risk-mitigation strategy that inspires additional confidence in potential investors.