If you follow the headlines around startup funding, you’re likely inundated with talk of seed funding, unicorns, and supergiants. However, while much attention is often given to venture financing, the truth is that few startup founders are able to acquire venture capital. According to one report, only 0.05 percent of startups raise venture capital.
Still, while competition for venture capital can be fierce, the value of going the venture financing route is clear.
“The upside is obviously you have access to capital you can use to grow the business,” says VC financing expert Robert Suffoletta. “You’re also getting advice and an experienced partner. In addition to bringing investment money to the table, a venture capitalist can be very helpful in building out the management team, helping to think through the business model, and helping with introductions to potential customers or suppliers.”
Suffoletta is a partner in the corporate and securities practice of Wilson Sonsini Goodrich & Rosati, a law firm that specializes in business, securities, and intellectual property law. On March 3, 2022, he hosted a webinar for Founders Network members where he provided the process of preparing for venture financing.The biggest mistake people make is essentially not being ready. Click To Tweet
Cover your bases
According to Suffoletta, preparing for venture financing starts with having your legal bases covered. This includes incorporating or otherwise forming your company and getting the founder’s stock properly issued. You also want to get any intellectual property documented.
“The biggest mistake people make is essentially not being ready,” Suffoletta says. “They either have the business idea, but they don’t have the legal stuff taken care of. Or, they have the legal stuff taken care of, and they don’t have the business items thought through.”
Equally important to having your legal bases covered is having a good team in place, says Suffoletta.
“The other key thing it takes is you need to have a strong team that ideally has experience in starting and building companies,” Suffoletta says. “By the time you get to venture funding (as opposed to seed funding), it’s important to have your team more filled out. You don’t necessarily need a complete management team. But you should have key members in place, and ideally members who have been through it before, know how to build a company, and have been successful in doing that.”Investors at the end of the day are usually looking for some kind of exit, whether M&A or public offering. Click To Tweet
Venture financing fit
However, even before founders get to this stage, Suffoletta says they should consider whether their business is a good fit for venture financing to begin with.
“It’s also important to have a good marketable business idea that is focused on a large growing market, whether that’s tech, software, e-commerce, semiconductor, life sciences, clean tech, etc.,” Suffoletta says. “Investors at the end of the day are usually looking for some kind of exit, whether M&A or public offering. So if you’re going to get outside funding or venture funding, you want a business that is going to lead to one of those exits. You want something that can scale and go public, or something that can scale and get sold.”
With all of the fervor around venture financing, many startups often wonder whether their company is large enough to compete for venture capital. However, while some founders might think their ability to acquire venture financing is dependent on the size of their company or their revenue, Suffoletta says revenue figures aren’t a make or break thing.
“Having revenue gives you customer validation. That can be key to raising funding. But it really depends on the company and the industry,” Suffoletta says. “For instance, if you’re in life sciences, revenue isn’t really important in the beginning or even after you’ve raised money because you’re working on building the product and the technology. The revenue is all going to be down the road. In non-life sciences businesses like technology, it is much more important to have revenue. But I wouldn’t say it’s essential depending on the strength of the team and the market opportunity.”
In his webinar, Suffoletta covered:
- What startups should do to prepare for venture financing
- The legal documentation required for venture financing
- The mistakes founders make in VC deals
- The upsides and downsides of venture capital