Starting a business usually requires originators to obtain an external source of financing to allow market expansion. For young companies, leasing or credit are unavailable or financial institutions grant them on unfavourable terms. Business Angels, but also Venture Capital funds can be an alternative. Let’s take a look at the last of these. How to get VC funding?
What is Venture Capital funding?
Venture Capital funding is the capital support of an SME entity by funds with the financial resources to invest. VC funds usually benefit high-risk investments such as start-ups. They have the know-how, but lack the resources to grow.
Unlike a loan, Venture Capital is not about providing capital at a certain interest rate, but about the fund’s participation in the venture. In return for the funding, the fund becomes a co-owner of the company by taking up shares. For this reason, Venture Capital is best suited to the establishment of equity companies whose assets are easily reflected by shares or stocks. In reality, the success of the venture therefore depends on both parties to the investment. The better the new product or service performs, the greater the returns the investor will see.
How to apply for VC support?
The first step in obtaining VC funding is to prepare a so-called PitchBook (also: Pitch Deck or Confidential Information Memorandum). This is a presentation designed to attract the attention of the financier and convince him that the project he is looking at is worth placing funds in. Typical elements found in a Pitch Deck include:
- a brief presentation of the company;
- identification of the target market;
- identification of the problem faced by the product’s target audience and its solution;
- the business and marketing model adopted;
- the activities implemented and the plan for the future;
- competitive analysis;
- composition of the team and presentation of its qualifications;
- identification of the desired amount of funding and its allocation.
Of course, preparing a simple presentation is not enough and it is worth making an effort to ensure that the information contained in it catches the imagination. Venture capital funds may reject an application, for example due to a lack of sufficient market insight, ignorance of the competition or an incoherent vision of product monetisation.
What increases the chances of obtaining funding is uniqueness. Today, the market is flooded with such a huge wave of products and services from virtually every industry that a company that does not have a product or technological advantage, but provides customers with virtually the same solution as the competition, has little chance of success. The ability to quickly scale a product or service to foreign markets is also of great importance. Indeed, it is often globalisation that determines a company’s rapidly increasing profits.
What are the main advantages of Venture Capital?
The main advantages of VC financing include, first of all, that the investor does not need to be secured. He receives a certain amount of capital, but does not need to own e.g. real estate, a fleet or yet other assets, which will be encumbered by limited property rights.
Obtaining support from Venture Capital does not only mean money for the new company. By taking up shares or stocks, the investor assumes part of the economic risk associated with the development of the investment and therefore supports the development of the entire enterprise. Often young companies using VC gain access to professional financial, technological or legal advice, i.e. assets that are difficult to value, which is sometimes referred to as smart money.
The use of a VC strategy also results in the company receiving a high level of capital immediately. This allows it to develop dynamically, but at the same time does not encumber its assets. Rapid progress is also an image value – it is worth cooperating with a company with visible potential.
Does Venture Capital funding have disadvantages?
When deciding on Venture Capital financing, one has to take into account its specifics. First and foremost, giving away part of the shares in exchange for capital means that the shareholders lose some control over the company. It is up to the negotiation of the parties to decide how much power in the entity’s structures can be retained, as well as how much of the profits will have to be shared.
Another issue is the timing of the fundraising. It can take many months from the time negotiations are undertaken and the Pitch Deck is submitted until capital is made available. Such a long period consists of negotiations, formalities related to the change of structure in the company, but also the analysis of the idea itself. There is no shortage of those willing to raise financing! This is why a company that decides to go for a VC should have its own funds at its disposal, which will allow it to survive until foreign capital is involved.
Finally, it should not be forgotten that the aim of a VC is to increase the value of the investment over time. It may turn out that a company, which sold its shares for one million zlotys at the time of the investor’s withdrawal from the company, will suffer a loss, as it will turn out that the value of the shares has increased even several times. For this reason, it is worth remembering to accumulate reserve capital, which will allow for the eventual repayment of the withdrawing shareholders or VC shareholders.
Raising financial support is the key to success for many ambitious entrepreneurs. Our law firm meets these needs. Acting on behalf of our clients, we conduct negotiations with the Venture Capital fund aiming to determine the most favourable conditions for the entry of an outside shareholder e analyse the articles of association, the investment agreement and support startups within the framework of ongoing legal services for startups.