You’re doing everything wrong.
At least, that’s what the voice in your head often screams at you when you’re trying to build a business. You know the voice—the one that makes you question every move you’re making, insists your choices will lead to dire consequences, and just generally annoys the living stuffing out of you.
You’ve become an expert on acknowledging, and then ignoring that voice so you don’t wind up paralyzed by indecision (or worse—fear). But one day you finally encounter a challenge that throws you, and everything the voice has ever said comes rushing back in a terrible moment of crushing self-doubt.
What now?
Whether you’re running into stagnation because of limited resources, staring at a growth opportunity you can’t finance on your own, or simply realizing your ambitions have outgrown what bootstrapping can reasonably support, you could be looking into venture capital.
And that’s when the voice in your head gets some company.
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Understanding Venture Capital in Business Venture capital is equity financing provided to businesses investors believe have the potential for substantial growth. Rather than lending you money that you'll repay, VC investors provide capital in exchange for an ownership stake in the company. |
So, your company cracked anti-gravity? Unbelievable! And yet somehow, still not enough.
A great idea—even one that’s been brought to life—isn’t enough on its own to secure venture capital. Investors will expect to see evidence that there’s a market for the idea. That means researching reputable sources for information that supports your idea, providing current sales figures, identifying your audience, understanding whether there’s competition and what makes your offering different or better, and much more.
Assuming you’ve cleared that hurdle, you’ll also be asked about growth potential. More research. Have you quantified the market demand to understand the opportunity for your business? Are there figures suggesting how that market could look in 5, 10, or 20 years? How do you intend to secure and defend your share of that market?
There will also be questions about your current team: what are their qualifications? Are they capable of executing a growth-driven plan for the business? Do they have the experience necessary to build on your success? If you are missing key players, how will you go about finding and vetting them?
And finally, you’ll need to show that capital is truly what’s needed to take advantage of the business’ potential.
This is not intended as a comprehensive list of the things you’ll need to address in a meeting with a VC provider. But it should give you insight into the amount and intensity of preparation needed. Walking through the door with a dream and a slide deck won’t cut it, no matter what you saw on "Shark Tank."
If you get the feeling during your pitch that the VC folks have an agenda, you’re right. This isn’t some magical money machine that vends cash for anyone who happens by and presses the button. Their job is to understand the opportunity—and the risk—as thoroughly as possible before putting their money behind you.
What do they want to know? The short list—how big can your company become? Why you, instead of the guy they talked to yesterday who had a similar concept? Why now? What does this money enable that couldn't happen otherwise? What milestones does it buy? How much additional capital are you likely to need? What does a successful outcome ultimately look like for investors? Do you have any idea of how to run a company?
You might hear these questions from them directly, but more likely they’ll be implied in broader questions they ask. Be sure you go in knowing the question you’re answering might not be the one they’re asking.
Before writing you a check, one of the biggest aims of the VC provider is to learn everything about your business there is to learn—and that includes anything you’d rather they don’t know. So it’s best there are no secrets between you.
Don’t oversell anything. It can be tempting to provide only the rosiest projections, the neatest-looking fundamentals, or even inflate your own or your team’s abilities.
This will almost certainly end badly.
Anything you manage to conceal through funding will likely become apparent not long after the VC provider becomes involved, and now you’ll have lost their trust. Worse, deliberately concealing or misrepresenting material information can create problems considerably more serious than a damaged relationship. Be upfront about your challenges. If you didn’t have any, you wouldn’t be talking to a VC provider in the first place.
Take yes for an answer. Many times, founders will keep selling the company’s virtues even after they’ve apparently won the day. They might see this as bolstering confidence, but it often reads more like, “Are you sure you’re impressed enough? Maybe I should tell you more.” It can undermine your credibility and breed curiosity about why you’re selling so hard.
Answer the question you were asked. Being transparent doesn't mean emptying the entire contents of your brain onto the conference table. Answer questions completely and truthfully, disclose anything material, and then stop. Going several miles beyond a reasonable answer can make you appear unfocused—or worse, leave investors wondering why you're trying so hard to convince them.
It would be nice if you rode off into the sunset and continued on with your business as you always have, wouldn’t it?
Yeah. That’s not going to happen.
VC backing means you’ve entered into a serious commitment, and your dedication to that begins the moment you shake hands on the deal.
This isn’t like a loan. The rules are different. You sold your backer on a great idea with a solid plan and visible growth trajectory with eventual upside for the firm. Now, you have to deliver that. Making meaningful progress toward the milestones you raised against while simultaneously displaying responsible capital deployment is table stakes. And speaking of tables, resist the foosball table for the break room. Probably not responsible deployment.
Ongoing updates, reports, projections, and revised expectations are part of your world now. As a founder, you might feel entitled to make decisions about what is communicated and when. To an extent, you still do. But it’s to your advantage to keep the VC provider apprised of the company’s general standing on a regular schedule (and they may have already established one you're expected to adhere to). If the news is good, all the better. When it’s not as good, many VC backers can offer coaching and assistance to help get things back on track. They have skin in the game, too. They want the company to succeed.
Your company’s performance, cash position, runway, hiring plans, forecasts, and other key metrics may all become part of regular updates to your VC provider. Providing those details is now part of your job.
A lifetime of watching bad Wall Street films leaves many folks thinking the best course in business is to find the silver lining and make that the story. Nothing could be further from the truth.
Aside from the fact that it’s always best to avoid creative dishonesty, your VC backer will be a collection of highly experienced professionals who can smell a wafting of BS from 100 miles away. You won’t be fooling them by announcing that your recent negative quarter exposed some great opportunities moving forward, even if that’s true.
When you have a tough story to tell, just tell it. If there happens to be a silver lining, get into that as well and how you plan to exploit it. But don’t try to soften any blows or dismiss bad numbers with a hand wave. You won’t be kidding anyone, and you’ll be diminishing your credibility in the process. Not worth it.
If you’re one of those people who lets out a sigh of relief when your paycheck hits the bank, prepare for disappointment. This is one payday that comes with more, not less responsibility.
Aggregate numbers on a bank statement can feel reassuring in isolation. But think about that aggregate in terms of obligations, desired outcomes, expenses… really, overall runway, and soon it can feel very small, indeed. $10 million is a huge sum of money, but not when ops is costing you $900k/month and you still have unpredictable monthly recurring revenue. VC cash is finite capital, and how you deploy it should ultimately support the milestones you raised it to achieve.
The spending decisions you make will impact your runway and burn rate. So looking at them occasionally won’t cut it. Hiring three people? Each represents an ongoing hit to your cash pool in salaries and benefits, not to mention employer payroll taxes. The search itself costs time and resources you might also need elsewhere.
Other considerations include costs that can shift unexpectedly—software, contractors, benefits, facilities, materials, or any number of expenses specific to your business—along with outside events that affect your market, brand, or customers. Keeping close tabs on your burn rate and runway is crucial to reacting in a timely manner when the unexpected happens.
The forecast is very rarely dead-on. The variance is the value. If a target was missed (or exceeded!—it’s not always bad news!), you get valuable data that tells you how to frame your next forecast. Has the market slowed? Deliveries exceeded estimates? Unexpected departures left a lag that hurt sales? Identifying what made a forecast miss tightens your practice and provides insight into which of the many variables affecting your business is variabling the hardest.
There’s money in the bank, and things will change faster than ever now—including your business’ complexity. If you think things were crazy with 25 employees and 200 customers, wait until it’s 75 employees and 1000 customers. It’s not just bigger numbers and the same challenges. Growth brings all-new challenges. It’s more important than ever to know where you are and where you’re going.
The accounting, finance, tax, payroll and HR processes you have today may not be adequate after another 20 hires, a new state, a new product line or another financing round. Among the many decisions you’ll need to make in back-office ops are: in-house, or outsourced? What tech stack should we consider? What about nexus? Sales commissions? Bonuses? An employee manual? Those questions and more read like an encyclopedia, so having good guidance is a must.
Rapid growth makes it very easy for finance, accounting, payroll, HR and leadership to develop separate versions of reality. The systems supporting growth need to communicate with one another. When your mix of providers gets too mixy, you can have difficulty getting agreement and understanding where things stand. Beware too much “this information belongs to OUR team” thinking. What happens in your ledger affects taxes. Which affects finance. Which affects payroll and HR. And all of that in reverse, too. Keeping teams walled off is a surefire way to get stung by a problem you never saw coming.
VC funding can feel like newfound freedom, but it doesn't remove constraints. It changes them. Before funding, the question is often Can we afford to grow? Afterward, it becomes Can we grow fast enough, intelligently enough, to justify the capital we've raised?