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When it’s time to discuss funding for a new business, there are a number of options. From self-funding or “bootstrapping,” to crowdfunding, to obtaining a small business loan, many paths can be fruitful. But if an entrepreneur needs to raise a lot of money in a short time, one particular route may stand out from the rest.

Venture capital (VC) funding is designed for new companies that are in the early stages of developing private equity. It can help budding entrepreneurs who want to grow to a large scale fairly quickly, but unlike a private loan, it doesn’t require repayment. Instead, funders will receive equity in the company — if the business profits, so do they.

Raising capital this way goes back to the time right after World War II, when funding for high-tech innovations started shifting from wealthy families to institutional models, such as universities and insurance companies. , former professor and assistant dean of the Harvard Business School, became known as the father of venture capital. His firm, American Research and Development Corporation, helped fund several major companies that still exist today.

Since then, VC funding has made many technological advances possible. Entrepreneurs who want to secure venture capital funding need to develop a solid business plan and pitch deck, make sure they have a solid management team in place and invest significant time into networking.

Several types of organizations or individuals might provide VC funding:

• Angel investors: Individuals who use their personal funds to help startups
• Traditional VC firms: Professional groups that manage pooled money from limited partners (LPs)
• Angel syndicates: Groups of angel investors pooling resources
• Corporate venture capital: Investment arms of established companies
• Growth equity: Funders that focus on companies that have proven business models but will be able to grow even more

Organizations that provide funding typically do so because they believe the product or service offered has the potential to grow exponentially.

Entrepreneurs who wish to secure VC funding should be well past the beginning stages of planning their business. They need to have all their ducks in a row so they can impress potential investors with the organization of their business plan.

While every business is different, there are several steps they can take to secure VC funding:

• Developing a pitch deck: This 10-to14-slide presentation provides details about the problem, solution, market share and financials.
• Networking with potential investors: It’s important to secure “warm” introductions, which are contacts made through networking events, LinkedIn and similar avenues.
• Pitching: Once the business owner has made helpful professional contacts, it’s time to schedule a formal pitch meeting.
• Offering background information: Potential investors will want to closely examine the business’s management team and its legal, financial and operational documents.
• Agreeing on terms: An attorney should be involved in this step, which includes details about the investor’s stake and involvement in the business.
• Closing: Finally, it’s time to sign legal documentation and receive funds from the investors.

This type of investment typically follows a pattern, with as many as seven stages:

• Pre-seed: This is the bootstrapping stage, when a business owner acquires funding from family and friends and uses personal resources to get their product started. Entrepreneurs should use this early time period to solidify their business model. The average investment size is between $50,000 and $250,000.
• Seed: Businesses require modest sums during the seed stage for market research, product development and the process of setting up a management team. The average investment size is between $500,000 and $2 million, depending on the industry.
• Series A: This is the first round of financing in which a startup needs to show investors how the product can lead to major gains. The average investment size is about $12 million.
• Series B: While Series A investors are betting on a company’s potential, Series B investors want to see the actual product’s performance. Funds will support the growth of an already thriving company. The average investment size is about $30 million to $40 million.
• Series C: It takes about two or three years for a startup to reach Series C-level funding. The company must have a strong customer base and history of growth. Frequent investors at this stage include corporate VC funds, hedge funds and banks, and the average investment size is between $50 million and $150 million.
• Mezzanine stage: By this point, the company has become a proven business. Many of the investors may choose to sell their shares for a profit.

Venture capitalists (VCs) understand that not all their investments will pan out. The 80/20 rule, also called the Pareto principle, states a small percentage of speculations (20%) will bring in 80% of a VC’s total returns. The hope is the few investments that do bring in large amounts of money will more than make up for the ones that don’t work out. 

One reason why VC funding is common is because it drives innovation. There are of successful companies that got their start because investors took a chance on them. Some of the benefits of VC funding include:

• Access to significant financial resources: People often say that one has to spend money to make money — which can be a problem if there are no funds to draw upon. Investors can help by providing a quick infusion of cash, which allows the business to start stronger.
• Strategic guidance from investors: These individuals or companies are well invested in the outcome of the business. That means they are often happy to act as a mentor, offering wisdom based on years of experience.
• Credibility: Investors likely have a strong reputation in the business community, and so their stamp of approval can go a long way toward earning respect for a startup.
• Networking: For a young business, making connections can be an extremely important part of growth. Investors can make valuable introductions within the industry, which in turn can lead to further expansion.

To a budding entrepreneur, this type of funding seems like it’s the obvious solution to any potential money problems. But it’s a highly competitive landscape, and only certain types of businesses are likely to attract investors.

For starters, there has to be a solid market for a new product or service. If there’s not enough demand right away, VCs likely won’t want to invest.

A startup may also have difficulties securing funding if it hasn’t developed a winnable pitch. As mentioned previously, a pitch deck is an important part of convincing investors that they can and should bet on the product and the team. The deck needs to clearly state the problem, the value proposition and its business model.

In addition to being difficult to obtain, this kind of funding can also be risky in itself. For one thing, the entrepreneur loses some amount of control over their business. Yes, they can receive valuable mentorship in exchange, but some startup owners balk at the idea of another person stepping in and insisting the business be run with their input.

Not only may investors want some control in the company, but they also may prioritize profits over the founder’s vision, which could lead to serious conflict.

VCs also result in a dilution of equity. The more funding an owner receives, the less of a stake they will have in the overall profits. Thus, a business that is making a large amount of money may not be quite as lucrative for its founder as originally anticipated.

More than anything else, business owners need to do their research and be fully prepared for everything that working with VCs entails.

For budding entrepreneurs interested in learning more about business concepts like venture capital funding, ���۴�ý offers online business programs, including a Small Business Management and Entrepreneurship Certificate.

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Disclaimer: This is not financial advice. Please consult your own tax advisor.