To say that fundraising for a pre-income startup is difficult is an understatement. Traditional sources of capital like banks and private equity are reluctant to invest in new businesses that don’t have impressive financial standing and adequate fixed assets to back their loans. In this scenario, venture capitalists (VC) are a great option.
Is this an avenue entrepreneurs in 2022 should consider? Absolutely! In the second quarter of 2022, venture capitalists invested around $58 billion in new startups. When writing a compelling pitch deck to attract funding, one of the first things you will learn is how to value a startup from a CV point of view. Read on to understand the benefits of getting venture capital funding and why you should be targeting them in 2022.
Venture capitalists are open to supporting new startups and innovations
Unlike other sources of capital, venture capitalists invest in high-risk startups that have yet to generate sales and revenue, demonstrating that they are viable investments. More than the business itself, VCs focus on other factors such as the entrepreneurs track record with previous exits, the founding team, and the specific idea the business is based on.
Venture capitalists support innovation and breakthrough ideas that have the potential to generate returns of 25% to 35% per year throughout their investment period. They will also fund startups working in new and upcoming fields and industries such as technology, artificial intelligence (AI), and green and sustainable initiatives.
VCs invest in the future growth of the startup
Entrepreneurs targeting venture capitalists with their fundraising efforts can expect more than just funding. They can also expect assistance with industry-specific expertise and the development of essential infrastructure necessary for business growth.
More than 80% of venture capital capital is used to fund production and manufacturing units and develop robust marketing strategies to promote products and services. Other areas where venture capital is used include sales promotion campaigns, advanced and efficient distribution channels and logistics, and working capital. Entrepreneurs are also encouraged to build more fixed assets.
The objective of venture capital is to quickly create the startup
When VCs invest in a pre-revenue startup, their goal is to grow it quickly so that it is viable enough to attract funding from other sources in subsequent fundraising rounds. This factor can be a disadvantage, as venture capital is primarily aimed at developing a strong balance sheet and infrastructure in order for the company to grow to sustainable size and build credibility.
Once the startup reaches proportions where it becomes a viable investment, VCs are likely to pull out and exit with the help of investment bankers. At this point, institutional public equity markets may provide liquidity, or the company may be converted into a corporation for a public equity issue or IPO. This is basically how VCs work. They grab an exciting concept that shows potential, nurture it until it grows and flourishes, then liquidate their investment.
To answer the question – why target venture capitalists for pre-revenue fundraising – VCs are the ideal source of funding for new and innovative ideas. Entrepreneurs get financing, know-how, and expertise that can be invaluable in quickly scaling their new business.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by “Shark Tank” star Barbara Corcoran and published by John Wiley & Sons, the book has been named one of the best books for entrepreneurs. The book offers a step-by-step guide to the current way of fundraising for entrepreneurs.
More recently, Alejandro built and left CoFoundersLab, which is one of the largest online founder communities.
Prior to CoFoundersLab, Alejandro worked as an attorney at King & Spalding, where he was involved in one of the largest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since its inception and has been invited to the White House and the United States House of Representatives to provide input on new regulatory changes regarding online fundraising.