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Venture capital (VC) plays a crucial role in helping startups achieve their true growth potential.

Across industries, VC investors are backing groundbreaking new solutions and platforms that aim to improve our daily lives.

In this article, we break down what venture capital is, how startups raise funding, and how technology is transforming the process.

Understanding Venture Capital

What Is Venture Capital?

Venture Capital (VC) is a type of private equity (PE) funding that investors put into startups and small businesses with high growth potential. 

VC funding is usually provided by individual investors, investment banks, and financial institutions.

In the case of startups, investors provide VC funding in exchange for company equity. Typically, VC firms take a minority stake (<50%) in a given startup because the startup becomes one of the firm’s portfolio companies.

Venture Capital Investment Strategies

A venture capital firm’s investment strategy is the blueprint for how it divvies up capital among various investment opportunities. This includes pinpointing which industries and company stages the firm’s investments will focus on and the types of deals the firm will go after.

When creating an investment strategy, VCs have to take into account:

  • The firm’s overall investment thesis
  • Risk tolerance
  • Resource limits
  • Portfolio diversification

Comparing Investment Models

Venture Capital vs. Private Equity

Broadly, the private equity industry buys and manages privately held companies. PE aims to help the companies become profitable through various investments and deliver high returns for their own investors.

Venture capital is a subset of private equity, but there are some key differences in the investment strategies used.

  • VC focuses on investments in startups that have not yet achieved profitability but show high growth and revenue potential. PE firms acquire privately owned companies and take control of their operations with the ultimate goal of making them profitable and selling them.
  • VC money is almost always devoted to early-stage startup companies, but PE firms often strike deals with more mature companies.
  • VC firms use equity for funding whereas PE firms may use a combination of debt and equity.
  • There is usually more risk associated with VC investments than PE investments since startups with no previous record of profitability are more likely to fail.

Venture Capital vs. Angel Investors

Venture capital firms typically operate using a limited partnership (LP) structure. Under this arrangement, investors are limited partners and the firm’s managers are general partners. LPs invest in startups while general partners invest in the firm itself.

Angel investors, on the other hand, are high-wealth individuals who invest their own money in early-stage companies in exchange for equity.

Angel investors are typically more open to investing in a startup based on its mission or idea, whereas VC investors need to see proof of a company’s market potential.

Another key difference is the level of involvement with the target company. VC investors usually expect to have a significant amount of decision-making power and operational control, whereas angel investors typically have little involvement in how the startup functions.

Building Relationships with Venture Capitalists

How to Attract Venture Capital Investors

Consider the Financials

Startups looking to raise venture capital funding should first assess their financial situation. For example, does the company need funding in the very immediate term? Will it need financing a year from now? Is the company structured in a scalable way? How will the funds raised be spent?

Startup founders should also weigh the pros and cons of giving up a percentage of the company in exchange for funding.

Another key factor to consider is the condition of the market in general. Broader economic conditions, regulatory updates, and industry cycles can all affect how VCs invest at a given time.

Make Your Minimum Viable Product the Best It Can Be

Securing VC funding requires a strong product-market fit. Investments won’t matter if there is no market demand for what your company is selling.

Your minimum viable product (MVP) is the most basic version of your product that has enough features to meet customers’ needs. The goal here is to test it with early users and get feedback to ultimately make your product better.

Test your MVP with a select group of interested people and see what they like, what they struggle with, what excites them, what would make them buy, etc. Use the feedback to make improvements, then test again.

Assemble Your Pitch Deck

Every startup needs a pitch deck to grab the attention of possible investors. The deck should showcase your company’s mission, strategy, and market potential in a succinct and highly visual way.

Be sure to highlight what value your company provides and how your team is uniquely positioned to execute on its potential.

Identify Investors That Align With Your Mission and Product

When seeking funding for your startup, it’s crucial that you identify investors whose strategies align with your company’s product and goals. 

You’re much more likely to secure funding with a more targeted investor search than by casting a wide net.

Be Ready for the Due Diligence Process

Before they hand over the cash, VC investors will want to dig into all the nitty gritty details of your business through the due diligence process. To prepare, you’ll want to gather documentation and data on the following aspects of your company:

  • Financials
  • Intellectual property (IP)
  • Data security
  • Weaknesses and potential risks

Venture Capital Trends to Watch

Investors Are Flush With Cash

On the cusp of H2’2024, venture capital investors reportedly have a pool of $311 billion in unused funds, also known as “dry powder.”

Combined with a stabilizing economy, steady interest rates, and plateauing inflation, this surplus could spur investor confidence — and as a result, more deals.

AI Is Transforming the Due Diligence Process

The way that investors are performing due diligence is shifting away from manual processes and “gut feelings.” Over 75% of VC investors will leverage AI and data analytics to inform their investment decisions by next year, according to Gartner. 

AI-powered platforms like Grata are crucial to making the due diligence process more thorough and efficient.

Investors can use Grata’s end-to-end deal origination platform to search for companies and market segments with highly specific filters to find targets that align with their unique goals. Each company profile contains up to 25 data points, including financials, ownership, employee headcount, and more.

Investors can also gain a full understanding of their industry of interest with Grata’s recently launched Market Research. Grata users can see proprietary transaction data, including deal values and valuations, on any market.

To see how Grata can enhance your due diligence workflows, schedule a demo today.

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