Raising venture capital: 7 ways to raise capital for your startup
There are several ways to fund your business, but raising venture capital (VC) is one of the best ways to accelerate growth and gain industry guidance.
However, raising capital can be a major challenge and can take up to six months to secure, and even longer to be notified of a rejection. The last thing you want to do is neglect growing your business and to focus all of your time and energy on procuring VC, only to hear ‘no’ and watch your business go under.
Understanding best practices are key. In this article, we’ll provide guidance on how to secure investor meetings as well as how to create the perfect pitch deck to help you win capital investment.
Table of contents
Best practices to successfully raise venture capital
- Prepare by identifying your needs
- Search online to locate potential investors
- Network to build relationships
- Hire an advisor for expert insights
- Choose an investor in your niche
- Create a winning pitch deck
- Bonus tips to go the extra mile
Is seed funding the same thing as venture capital?
Seed funding and venture capital are both private investments in exchange for equity. However, when raising seed funding, you’re asking for a significantly lower monetary amount compared to venture capital—tens to hundreds of thousands of pounds vs. millions, respectively.
Therefore, while seed funding falls under the venture capital umbrella, consider it your first step of many in seeking funding in exchange for equity.
Seed funding is meant to help get your business off the ground or keep it afloat, while venture capital is meant to drive growth. Seed investors are often individuals while venture capital usually comes from institutions.
Ultimately, seed funding helps you raise money to conduct market research, hire a team and develop products or services, whereas venture capitalists help you broaden your reach.
Pre-seed funding exists as well, but this unofficial funding round is often not in exchange for equity. Pre-seed funding is meant to add to your initial out-of-pocket funding (if you choose to bootstrap your new business) and pre-seed funder’s aim to provide intensive guidance and support.
That said, pre-seed VC is starting to become more common, with companies like Seedcamp eager to invest in what they consider to be winning ideas.
Seedcamp, for example, offers £150-180K usually in exchange for 6.5% ownership of your business in a pre-seed round and “provide you with everything you need to get off the ground”. Pre-seed VCs are interested in partnering with potential future unicorns before anybody else has a chance to hop on the bandwagon.
Here are some examples of pre-seed and seed funding opportunities.
- Friends & family investors: Before looking for venture capital, you can ask your network of family and friends if they’re interested in helping finance your business. Friends or family members typically invest somewhere between £10,000 and £150,000 of their personal finances into your business, without taking any equity. While this process is less formal than anything else and considered pre-seed, you should still carefully document each investment to help stay organised and maintain clarity.
- Incubators & Accelerators: Incubators are helpful for when you have a great idea but don’t necessarily have a proven business model yet. Incubators will support your startup with mentorship, expertise and an environment that helps nurture your business to the market. Accelerators come into play after you’ve proven your business model but still need help getting to market efficiently and quickly. Incubators often don’t provide investment capital, whereas accelerators often do in exchange for equity.
- Angel investors: Angel investors, or private investors, are typically people, a syndicate or small entities with a high net worth that provide financial backing for entrepreneurs or new small businesses. Angels often invest between £100,000 and £2 million in an early-stage company. Typically, angels will request equity in your company in exchange for their investment. Because it’s risky, angels often expect a higher rate of return than late-stage investors. Angel investors also often provide mentorship support as they are invested in helping you grow. Angel investors fall into the “early VC” category.
- Early-stage VCs: These are investors, like the above mentioned Seedcamp, who are interested in backing world-class opportunities before anybody else even knows who you are. Usually, early-stage VCs are only interested in potential unicorns or the next big thing.
Quick Tip: Learn more about seed funding and other ways to get your business off the ground, such as startup loans, bank loans, crowdfunding, or bootstrapping, in our guide on 10 ways to fund your small business.
What is Series A, B and C funding?
These are the consecutive rounds of funding that take place after seed funding. The series label refers to the class of preferred stock sold.
While these rounds often take place in order, it is possible to bypass some of them if you have a brilliant idea that garners substantial interest. For example, ‘unicorns’, or startups with a valuation of over 1 billion, often skip traditional investment rounds because of how high their valuation is so early on in their startup journey.
In the UK, 2019 was a record year for unicorns, and it ranks #1 in Europe for most unicorns.
But, most companies proceed through these rounds in order. It’s also not necessary to complete all of these rounds—if you raise enough capital to steadily grow after the seed funding or Series A rounds, you can stop. And, you can even go beyond series C to Series D or E, but that’s uncommon as most companies usually raise what they need by the end of series C.
One of the key distinctions between these rounds is your business’s valuation. Valuations are calculated by looking at your proven track record, market size, management competency, maturity level and growth prospects.
Before you can figure out your valuation, you need to decide how much money you want to raise and/or how much of your company you’re willing to sell. If you choose the former, you should plan to raise enough to last between 12-18 months before you need to either raise more or earn enough revenue to stay afloat. If you choose the latter, founders typically sell 10% and 20% of their equity in seed or early-stage rounds.
It’s a good idea to see how much your competitors have raised to get a better idea of how to create your own valuation. Sites like Tech Nation and Crunchbase are fantastic resources for finding data on other businesses, investors, and sectors, down to how much they’ve raised per round and their respective valuations.
No matter which round you’re seeking investment in, it’s possible and probable to have many venture capital firms invest in your business each time. In all, these successive rounds represent your business maturing and growing.
Let’s examine each round in detail.
Series A funding
Businesses seek Series A funding or financing once they already have an established user base and consistent revenue. Series A funding is meant to help you further optimise your user base and product offerings as well as scale your product and introduce it to new markets.
Receiving Series A funding is a huge milestone for new businesses. Companies won’t receive Series A capital if they haven’t proved their minimum viable product (MVP), so winning this funding helps to further validate your business idea and model.
Typically, businesses in Series A rounds:
- Raise between £2 million and £15 million
- Have a valuation between £10M – £40M
- Pull in £100K to £250K per month in revenue
- Attract investors from traditional venture capital firms, but angel investors or equity crowdfunders can also invest in Series A
Acquiring Series A funding is incredibly difficult because companies are taking a big risk of investing before you’ve fully proven your business model.
Series B funding
Series B funding is meant to help you significantly expand your market reach. At this stage, you’ve proven your business model so it’s easier to establish trust with investors.
Series B funding helps you to expand your team, seek seasoned and experienced staff, and scale your overall business development efforts. Businesses seeking Series B funding are ready to transition from an established company to a competitive force in their target market.
Typically, businesses in Series B rounds:
- Raise between £10 million and £25 million
- Have a valuation between £30M – £100M
- Pull in £350K to £800K per month in revenue
- Attract investors from traditional venture capital firms, but may also attract investment from firms that focus more heavily on late-stage funding
Acquiring Series B funding is less difficult than Series A because you’ve already secured early-stage funding. This gives you social proof and proof of concept that helps to build trust with VCs.
Series C funding
Series C funding is meant for successful companies looking to develop new products or services or further expand into new markets.
Series C funding can even be used to acquire other companies, which in turn will give you access to new tools and staff that can help you expand your offering and reach. A merger like this can give you the competitive advantage you need to significantly scale your business.
Typically, businesses in Series C rounds:
- Raise between over £20 million
- Have a valuation of over £100 million
- Pull in over £1 million per month in revenue
- Attract investors from hedge funds, investment banks, private equity groups, traditional venture capital firms, as well as the traditional venture capital firms in the previous rounds.
By now, you’ve proven your business model so investment is less risky. Therefore, it’s relatively easy to procure Series C funding. Businesses that procure Series C funding may also be looking to boost their valuation before going for an initial public offering (IPO).
Best practices to successfully raise venture capital
The following advice applies to seed funding as well as early-stage and late-stage (Series A, B and C) funding. Follow these best practices to give yourself the best chance to secure funding to drive business growth.
1. Prepare by identifying your needs
Start by creating a detailed business plan. The reason why you should start your journey by creating a business plan is that it will help you figure out exactly how much investment you need and why you need it.
Knowing this will give you a better idea of whom to pitch to, how to frame your pitch and when to seek funding.
This is not the same as the pitch deck that we’ll outline below, but keep in mind that parts of your business plan can be incorporated into the pitch deck you eventually create. Further, a detailed business plan can be delivered after your pitch to supplement your presentation.
As you create your business plan, you’ll be able to fill in the gaps regarding your business goals, target market, target audience, competitive landscape, product definitions and financial projections. These are all crucial aspects that investors look for when analysing your pitch and deciding your potential success rate.
Use the SMART goals method to identify your goals and ensure they’re practical. SMART stands for: Specific, Measurable, Attainable, Relevant, and Timely.
If you’re seeking late-stage funding, make sure you update your business plan to match your current numbers, projections and roadmap.
Quick Tip: To learn more about how a well-executed business plan can help your company grow past the start-up phase and achieve success, read our post on how to create a business plan in 2020: A complete guide to writing your company roadmap.
2. Search online to locate potential investors
Once you have a better idea of what your business stands for and how you’ll make money, it’s time to research potential VCs. This will give you a good idea of whose looking to invest, what they’re interested in investing in, what pitches they typically hear, and so on.
In essence, this research will help you get a better idea of:
- What your chances are of procuring an investment
- If the investments on offer align with your business goals
Ideally, you’ll watch to find a list of VC’s that specialise in your target market. This way, you’ll pull in industry guidance from seasoned experts who can help you steer your business in the right direction.
There are several great resources that can help you find more information about active investors, both in the UK and on a global scale.
- Tech Nation: Search by investor type, whether it’s a first time fund, preferred investment stage, location and activity history. They even have a matching tool that can help you find the right investors for your business.
- Crunchbase: A source for investors and investees on a global scale, filter by location, industry, number of employees, total funding amount and last funding date. You can also conduct market research and follow trending profiles and recent news.
- Investor Hunt: Their paid version gives you access to a database of over 40,000 investors and 200,000 data points, whereas the free version allows you to dip your toe into a database of 4,000 investors. You can add advanced filters to your search, similar to the sites above, and even procure their email addresses so that you can get in touch right away.
- British Venture Capital Association (BVCA): They provide a directory of venture capital firms operating in the UK. The information is only available for free to members but non-members can purchase the directory for £125 for one year’s access.
Besides online investor databases, you can also do a quick google search for the top UK venture capital firms. Entrepreneur Handbook has put together a comprehensive list of UK VCs complete with links to each top-firm to help you get started.
Additionally, Crunchbase has collated the most active seed investors in Europe in 2019, broken down by pre-seed, accelerator, early- and late-stage rounds.
3. Network to build relationships
Forming relationships with venture capital investors, angels and industry peers will help you gain insight into who is looking to invest right now and who isn’t. Besides investment opportunities, networking helps you form a community of like-minded entrepreneurs and small business owners that you can share ideas and collaborate with.
Plus, if you help other entrepreneurs and small business owners with their investing queries and provide guidance where you can, you may receive the same free and invaluable guidance if a time comes when you need it.
So, where can you meet these investors and peers to form and build these relationships? There are plenty of networking opportunities that take place throughout the UK and especially in London.
Here are some of the best networking events in the UK to meet angels and early seed investors. (Note: COVID-19 may have paused some of these events so double-check the time and place before committing.)
- Capital Enterprise is an organisation of experts that operate a number of seed funds. They host a monthly networking drinks event for free as well as several other events in between.
- Business Funding Show helps to close the funding gap between funding providers and SMEs. They host tons of events including workshops, conferences and an annual flagship exhibition.
- Paradigm Talks host monthly informal gatherings meant to provide a space for entrepreneurs to pitch to VCs and angel investors.
- London Innovators is a private, members network of 600 technology entrepreneurs and investors that hosts events as a forum for visionary entrepreneurs & investors to connect. You can get in via invite or referral, and there’s no fee to join.
- UK Business Angels Association (UKBAA) is a members-only angel and early-stage VC investment network that hosts many events throughout the month. It’s open mostly to investors that can request to join, but they do occasionally have events open to entrepreneurs as well.
- Startupbootcamp Demo Days run accelerator networking events for insurance and tech innovators and industrial IoT solutions. Startups undergo a range of workshops and investor relation networking events.
- British Private Equity & Venture Capital Association (BVCA) hosts premier events for private equity and venture capital to promote networking that builds long-standing relationships across the industry.
- TechHub, the global community for tech entrepreneurs & startups, run over 1000 events per year that help entrepreneurs make new connections with peers and investors alike.
4. Hire an advisor for expert insights
If you feel you need more help after networking or searching on your own, an advisor can offer you advice on where to look for capital and how to structure your pitch. They can also introduce you to their network of VCs and angel investors who may be interested in hearing your idea.
In general, advisors can also:
- Act as a broker or intermediary to help you negotiate the terms of your deal, which is extremely important if you’re raising capital for the first time;
- Use their experience to help to accelerate the process of raising funding;
- Improve the terms and conditions of your deal through due diligence; and,
- Help you to prepare written documents, such as your business plan, pitch and term sheet.
However, even if you do hire an advisor, don’t rely too much on having them do all the heavy lifting. It’s important that you understand the fundamentals of fundraising and develop the skills necessary to prepare for your pitch and appear confident and prepared in your pitch and ongoing negotiations.
Plus, staying involved in the process also shows that you’re committed to your business’s success, something investors want to see in a founder.
5. Choose an investor in your niche
Many investors offer funding to industry-specific businesses. If your business type aligns with one of those industries, seek investment there first.
These investors will most likely have invaluable industry knowledge that you won’t find elsewhere and their guidance can prove invaluable. And similar to your target audience and customer personas, many investors also prefer to fund businesses that align with their target market.
Here at Tide, we sought funding from VCs that invest in early-stage tech opportunities because we craved industry guidance. In fact, Eileen Burbidge who is a partner at Passion Capital, one of the VCs that helped us acquire £14 million in our Series A round, acted as our chairperson in a critical period of growth. Her guidance was invaluable as we scaled our business.
That’s not to say it isn’t worth seeking investment in other places but start with niche investors first, if applicable.
Of course, many investment firms prefer to diversify their portfolio and therefore don’t specialise in one market over the other. Instead, they care more about your business model and whether it’s profitable, repeatable, expandable, predictable and defensible.
Plus, they want to see that you and your team have the passion, tenacity, flexibility, coachability and teamwork necessary to get the job done. If you have a big idea and a solid team to back it up, you may not need to seek the type of specific guidance you’ll find in a niche investor.
6. Create a winning pitch deck
Now that you’ve completed your research and have an idea of whom you want to pitch, it’s time to create a winning pitch deck that will earn you an investment.
The most important theme to take away from this advice is that you should tell a story throughout your presentation. Stories help the listener place themselves in the shoes of the people you are targeting. It also helps to engage and captivate your audience as you introduce your vision and ultimately explain why your business deserves funding and guidance.
Let’s dive in.
Slide 1: Vision and value proposition
Start with a quick one-sentence overview of your business and the value that you provide to your customers. Keep it short—140 characters or fewer. It should be attention-grabbing and easy to understand.
Many businesses compare themselves to other well-known companies to make their value proposition crystal clear. For example, “We’re the TripAdvisor for volunteer opportunities”, or “We’re the Uber Eats for prescription medication”.
Airbnb used to be called AirBed&Breakfast and in their seed funding pitch deck their value proposition was, “Book rooms with locals, rather than hotels”.
Slide 2: The problem
Explain the problem you’re trying to solve and exactly who has this problem. Make it relatable so that investors can easily understand and even identify with the problem you are trying to solve.
Outline how you know it’s a problem and introduce light research to back up your statement. If applicable, tell a short story of how you discovered the problem and why it interests you.
For their series B round, LinkedIn outlined the problem by showing how the existing solutions fail.
Here, LinkedIn approached potential objections by addressing them head-on. Because they had already validated their idea by obtaining investment in Series A, they didn’t need to prove that a problem exists. Rather, they needed to prove that their solution, if given the chance to grow, is going to overtake every other solution that’s still on the market (and it did).
Slide 3: Target market and opportunity
Go into more detail about who your target audience is and the market size. Explain how you will position your business within this market and how you’ll stand out from competitors.
This helps to explain the scope of the problem you’re trying to solve. Be specific with numbers and use your market research here.
If you have several market segments of varying customer persona profiles, share that information as well. This goes to show that you’re aware of the nuances within your target market and realise that people experience this problem in different ways and for different reasons.
Slide 4: The solution
Now it’s time to describe your product or service and how customers will use it. Think of this slide as the hero of the story.
You’ve built up a problem that resonates with the investors and now you’re showing how your product or service solves this pain point. Use visuals, such as pictures or video, to help bring this idea to life.
Make sure to touch on some alternative solutions on the market and why your solution is better than the existing options. What makes you special and unique? Focus on both features and benefits, but make sure to include several finished-story benefits as well.
For example, a feature is “seamless financial integration”. A benefit is “real-time automated sync”. And a finished-story benefit is “free-up your valuable time so you can focus on what matters.”
Investors are bombarded with features and benefits day in and out, but the finished-story benefit tells the story and paints a picture. It’s the “why” behind the what of your business.
But, don’t go too far into competitive analysis here. Focus more on what makes you unique and save the competitor analysis for a slide later on.
Slide 6: Validation roadmap
This is one of the most important slides in your pitch. If you have early adopters or sales, talk about that here. This will help to show you’ve proven your business model, validated your idea and are amassing a customer base.
Nothing is more captivating than a proven business model, especially for Series A investors. The more that you can convince VCs that your business model is worth their time and money and doesn’t pose a huge risk, the better chance you have of keeping their attention for the rest of the pitch.
Mention the milestones you’ve already achieved and the upcoming milestones you’re striving to achieve with this capital.
Answer the following questions, if applicable:
- How many paying customers do you already have?
- How much revenue are you generating on a monthly and annual basis?
- What’s your growth rate?
- Are you profitable? If not, when will you be?
- Do you have key partnerships in place?
- Do you have any key testimonials?
The Knot does this well in their Series C pitch deck.
They clearly demonstrate that their business model is pulling in significantly more unique visitors month-over-month than their competitors. The graph is visually compelling, and they make use of the colour blue, compared to competitors in grey, as well as a thicker bar to make their stats pop.
Slide 7: Revenue model
Now that they’re hooked, explain how your product or service will make money. If you are seeking seed investment, use this slide to prove that your idea will quickly become validated and profitable with the capital you’re seeking.
Outline how competitors make money and explain how your pricing structure compares to other key players (i.e. higher, lower, similar). Explain why you chose your pricing structure and the methodology behind it.
Are you offering a monthly subscription service or one-time payments? Do you make money from customers or advertisers? Will you be offering free trials? If so, what’s the conversion rate from free to paid users?
Outline your projected revenue, how much it costs to acquire a customer, or your customer lifetime value (LTV). However, don’t go into financial forecasts just yet—that’s coming in a later slide. The key for this slide is revenue and acquisition costs, two key factors that investors often care more about at the outset.
Slide 8: Marketing and sales strategy
How are you planning to attract new customers? What have you done so far that’s worked or failed? How did that help you pivot to a new, more efficient operation? What’s your sales plan and process? Is this strategy similar or different to what your competitors are doing?
Creating a comprehensive go-to-market strategy proves that you’ve put in the time and effort into knowing exactly how to attract customers to your value proposition.
A great idea rarely succeeds without a clearly defined marketing strategy, so explain your plan in detail here. This includes the channels you’ll focus on given your current resources as well as your competitive distribution and promotion strategy.
Alternatively, if you’ve already launched and are in late-stage funding, explain how you’ll further penetrate the market based on industry data and identified opportunity gaps.
Moz did this incredibly well for their Series B round.
They clearly show how organic drives 90% of traffic but wins significantly less investment than paid marketing. This doesn’t make any sense, and they are almost tempting the investors to break the mould and invest based on a missed opportunity, rather than stay in their comfort zone.
Slide 8: Team
Why is your team the right team to get the job done? Investors want to know that you have the best team to execute this idea—after all, they’re investing in you and your idea, and a great idea is weak without a great team behind it.
Highlight the key players and what expertise they bring to the table. What are their relevant skills and experiences? Where and how did you meet and what projects have you worked successfully on?
If you have an advisor(s), introduce them here as well and explain how their experience is relevant to the problem you are trying to solve.
Slide 9: Financials
Here you can go into more details about your financials. Borrow from your business plan, but don’t include in-depth spreadsheets. The visuals should be easy to read and understand.
Include your sales forecast and cash flow forecast for at least three years, balance sheet and so on. Mention your revenue-to-date again, if applicable, to remind them that you are already making sales.
This slide is all about explaining your growth based on the success you’ve already achieved or the success of a competitor to bring your numbers into reality. Investors want to understand that your projections are based on data and fact and not unreachable hopes and dreams.
Ultimately, the revenue model slide hooks the investors and grabs their attention, whereas the financials slide proves long-term success and growth potential.
Quick Tip: If you don’t have any revenue yet, simply skip that slide and focus only on your financial projections.
Slide 10: Competitors
Now is your chance to go into more detail about your competitors beyond the brief market research you laid out in slide 3.
This slide is specific to how you will defend yourself against your competitors. What are your key advantages and what edge you have over your competition?. Essentially, why are customers going to choose you instead of anybody else?
Incorporate competitive analysis visuals into your pitch here. Identify the characteristics of your competitors and go into detail about your established advantages. For example, is your system compatible with more hardware or software solutions than what’s available today? Is your software open source or proprietary?
Show the investors how you can obtain key segments of the market faster than competitors, and how you plan to persuade their existing customers to take advantage of your product or service instead.
Slide 11: Use of funds
The ask. Now is the time to ask for an investment an outline exactly how you plan to use the funds. At this point, the investors should completely understand what problem you’re trying to solve, how your solution works and why it’s better than anything else.
This is what you’ve been building up to. But, you can’t just ask and end your pitch. You need to ask and then go into detail about exactly how you’ll use this investment to achieve your goals and bring your vision to life.
Specifically, why do you need the amount of money you’re asking for and where are you going to invest it in your business. Will you use it to build out your team? Or is R&D or product development the next step in your growth plan? If you’re seeking late-stage funding, perhaps you need an infusion for a marketing push to help you reach new markets.
For example, “We are asking for £600,000 at £3,000,000 pre-money valuation to fund our customer acquisition strategies and go-to-market strategy. This will give us 12-18 months of runaway to repeat and scale our business model.”
From there, go into specifics on how you’ll divvy up the £600k into specific strategies, such as research, SaaS tools, email marketing, and so on.
If you already have other investors on board, mention them here and explain why they chose to invest. This adds social proof and helps to further validate your idea.
Learn all about starting your business in our whole business startup series:
1.1 How to start a business in the UK: 10 steps to build from scratch
1.2 How to find the perfect name for your small business
1.3 How to register a business? A simple guide
1.4 How to start a business without capital
1.5 10 ways to fund your business
1.6 How to create a business plan: 9 things to consider when starting
Bonus tips to go the extra mile
Here are some extra words of wisdom to help you build a top-notch pitch deck.
- In general, make sure to include demos and screenshots throughout your pitch deck to help investors visualise your product or service.
- In the same vein, keep your deck short and succinct. Don’t overload investors with information or endless bullet points. Rather, build excitement and get them eager to invest.
- Keep your deck current. If you created it a year ago, update it to the current numbers and latest progress.
Additionally, make sure to bring a more detailed write-up of your pitch deck (can be your business plan) that you can distribute after the pitch. This should include:
- Elevator pitch or Executive summary. The goal of the executive summary is to get investors curious and interested to learn more. Your first paragraph or opening statement needs to have a ‘wow’ factor. Think of the opening line in a Dragons’ Den pitch and include your vision and value proposition.
- Introduction letter. This gets a bit more detailed into your ‘ask’, how much you’re trying to raise and what you’re raising it for.
- Detailed financial spreadsheets. These are the spreadsheets and graphs that were too dense for the pitch, but important for investors to study afterwards.
Raising capital is equally exhilarating as it is exhausting. It requires a ton of time and effort and a commitment to seeking not only capital but industry guidance.
Seed and venture capital can be just what you need to launch your business into the market and achieve your goals and dreams. Take the time to prepare, network, seek advice and craft the perfect pitch to give yourself the best shot at success.
Did you know? You can register your business with Tide for FREE
Registering your business with Tide is incredibly fast, easy and free. You not only get to officially start your company, but you get a free business current account at the same time, which is the best way to ensure you’re keeping your finances in order from day one. Be your own boss and register your company with Tide!
Photo by fauxels, published on Pexels