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So You Think You Want to Raise Money From Venture Capitalists?
Admittedly, there’s quite a bit of glamour these days in being able to say that your company is a “venture-backed startup.” But for early-stage companies thinking about dipping their toes in the deep end of the VC fundraising pool, it’s important to step back and ask yourself a very basic question: “Do I want to take VC money or stick to angels?”
A lot has to do with how big your company has already grown — and how much bigger it can become in the future. Venture capital firms only want to invest in companies with proven products and proven business models that have the potential to become multi-million-dollar success stories. Angels might be willing to take a flier on an unproven business concept and a lot of trust and faith, but venture capitalists are focused first and foremost on cashing out of their equity stake in five years or less, which means they’re only looking for companies that have a realistic chance at going public one day, or of being sold (one might say “flipped”) to another bigger company for a really big price tag.
So where do you find these mythical VC firms? Most of them are based in the biggest tech hubs in the nation, and it’s rare to find a VC firm in one geographic region of the country investing in a startup company located in another part of the country. Thus, it’s no surprise that California (home to sunny weather and even sunnier Silicon Valley startups) accounts for 50–60 percent of all VC deal volume in any given year, while New York City and Massachusetts (home to all the whiz kid startups in Boston and Cambridge) account for another 20–25 percent of all VC deal volume. That leaves a sliver of VC deal volume in places like Texas, Illinois, Washington State, and Colorado. So here’s the reality — unless you’re based in a huge tech hub, the chances of lining up a big chunk of seed or Series A funding are going to be extremely low. You might be better off looking for additional angel investing money, or taking money from a local business incubator.
Most seed round valuations these days are in the $3 million to $6 million-dollar range, and the amount raised can vary from less to $100,000 all the way up to $2 million. However, once you start talking about Series A rounds (which can range from $2 million to $15 million), that’s when you start to see valuations starting to creep up past $10 million (and even $20 million).
Once VC deal sizes exceed $2 million, that’s when you’ll need to consider who the lead VC is going to be on the deal. The lead VC is usually the one firm in the fundraising syndicate that has the most money at stake — and as a result, takes the lead in dictating (not “negotiating”) the terms of the deal. If you want all the other smaller VC firms to get in line, you’ll want to make sure that the lead VC is kept happy, especially during the due diligence process. In return, you’ll get a few tasty morsels in return — like help to hire genius employees or to line up new customers and users.
Raising VC money can make sense for the right companies. But just realize that less than half of all seed-funded companies go on to raise a Series A round from VC funds. So you’ll want to make sure you have all of your ducks in a row before you put the word out that you’re looking to raise VC money.