Venture Capital: What It Is & How to Raise It

A team of three venture capitalists.

Developing your own business, launching a successful startup, or even growing a business after some level of early success can be a very challenging process, especially with the current state of the financial world. Every step of the business creation and growth process carries its complications and obstacles for people to overcome. Arguably the most significant is the struggle to gain enough capital to get everything off the ground and keep operations going. 

Many new businesses and startups can gain their needed finances throughout their business ventures through venture capital. But what exactly is venture capital, and how can you obtain it to fuel your newly launched business?

Our financial experts here at TaxRobot are ready to explain the fundamental basics of venture capital that you’ll want to understand going forward. Please continue reading to learn more and consider exploring our wide selection of other educational resources for even more critical information. 

Related: R&D Tax Credit Guide

What, Exactly, is Venture Capital?

Venture capital (or VC) is a type of financing and private equity that different investors can provide to small businesses and startups. Venture capital is typically provided to new or growing businesses that an investor believes to have a lot of long-term growth (LTG) potential and that will likely succeed in the future. 

Generally, venture capital comes from a range of different sources, including banks, pension funds, insurance companies, and other financial institutions, as well as well-off individual investors. However, venture capital doesn’t always take the form of monetary investments. Many venture capital providers choose to offer managerial or technical expertise to help support business and startup operations instead.

How Does Venture Capital Work?

Venture capital is often most needed in the initial development of a business or startup (also called the seedling stage) and once they have their first products and services ready to sell (the early stage). However, it’s also needed later in the game as businesses generate revenue and continue to grow (late-stage). Different venture capital providers sometimes prefer to focus on investing funds in companies at specific stages of development and growth to better their odds of potential returns.

If a business or startup is given venture capital and becomes successful, their venture capital providers will receive returns. If providers own any stock in the business, they can also make a tidy profit by selling to other investors on a secondary market.

How Can You Raise Venture Capital Funding?

A startup team going over a pitch.

Suppose your newly launched business or growing startup has determined that venture capital funding is a key resource needed to move forward successfully. In that case, there are several steps you’ll need to take to actually raise that funding. Thankfully, our team of experts has taken the time to break down the process you’ll need to follow into a range of several essential steps that you can take to get the financing you need. 

Related: 5 Best Startup Funding Sources in 2022

Step 1: Determine Your Business Valuation

Before reaching out to any potential venture capital investors, you’ll want to undergo a business valuation to determine its economic value. Business valuation involves a wide range of factors, and because every business is different, sometimes more traditional methods of determining valuation- like discounted cash flow, net asset valuation, and profit multiples- won’t work effectively. 

Consideration is typically given to the company’s age, growth rate, leadership, patents, customer base, and revenue. But ultimately, its real value is whatever the market is willing to pay for it.

Step 2: Figure Out Your Needed Funding

Next, you’ll need to determine how much venture capital your business needs to raise. It’s typically best to start with a minimum investment amount that will substantially change the overall risk profile of your company. However, the overall amount will depend on the amount of capital you need, the current stage of your business, and the difference between the business’ valuation and dilution preference.

Step 3: Develop a Quality Pitch

Developing an effective pitch to convince potential VC investors involves a lot of parts and varies depending on what your business does. You’ll typically need to provide;

  • A business plan
  • A pitch deck that explains;
    • What your product is, the problem it solves, and the solution it provides
    • What the market for the product looks like
    • How the product is performing
    • Forecasts for future growth
    • Competition details
  • A product demonstration
  • Detailed product documentation
  • References

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Step 4: Target VC Investors

You’ll then want to create a list of potential venture capital investors based on;

  • Your business or startup’s investment stage
  • It’s location
  • Its industry

From there, you’ll need to start forming network connections and setting up meetings with your potential venture capitalists. The best way to go about this process is through;

Step 5: Negotiate The Terms

Once you’ve located a potential venture capitalist to partner with, you’ll need to negotiate terms with them and a preliminary legal agreement. These agreements typically cover;

  • Control issues;
  • Economic issues;
    • Pre-money and post-money valuation
    • Investment type
    • Stock options
  • Stock options

Related: Qualified Research Expenses (QRE): A Complete Guide

Step 6: Utilize Due Diligence

Upon agreeing to negotiation terms, your business or startup should also conduct due diligence with the venture capitalist by discussing;

  • Any and all legal contracts involved
  • Sales, marketing, and product development plans
  • The market and competition
  • Business culture and expectations
  • Current and potential customers
  • Finance and human resources (HR) systems

Step 7: Close the Deal

A venture capitalist shaking a startup founder’s hand.

Once each of the steps above is taken, your business should be all clear to close the deal with your venture capital investors. This will typically involve signing various documents and agreements, including;

  • Legal opinions
  • Employment and confidentiality agreements
  • Investment agreements
  • Stock purchasing agreements
  • Voting agreements
  • Indemnification agreements
  • Amendment(s) to the bylaws

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Raise Capital – But Don’t Forget Tax Credits

Achieving venture capital can be a great way to get your new business or startup off the ground, as well as support continued business growth. If you’d like more information on different funding sources and tax benefits that can help your business going forward, please consider exploring TaxRobot’s website and trying out their specialized R&D tax credit software.

Do you struggle with effectively filing your business taxes each year and continually miss out on the various tax credits and refunds you’re entitled to? Our expertly designed system at TaxRobot is designed to help you save time while providing superior, audit-proof documentation to boost your returns.

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