According to the Q3 2021 PitchBook-NVCA Venture Monitor, $238.7 billion in capital was invested into VC startups through the first three quarters of the year. An influx of nontraditional investors in the venture capital space has created even more opportunities. As a founder, you should be well-prepared and informed walking into conversations with potential investors. Here are some key considerations as you pursue the funding your startup needs to grow.
What makes your company valuable?
You need a realistic understanding of your company’s value before you seek funding. Defining what a company is worth before it has measurable earnings may seem like guesswork, but it should involve more than your heart or your hunch alone. Assessing your startup’s value using strategically defined parameters and high-quality data can make or break funding decisions. Ask yourself these questions to get you started:
What are the management team’s strengths?
- What experience does the management team bring?
- What are their past successes that have bearing on this current business venture?
- What makes your team stand out?
Is the market ripe for your offering?
- Who is the audience?
- What is the addressable market size for your company?
- What problems will you solve or gap will you fill for them?
- What do they spend on similar solutions/services/products?
- What is the value of your target market?
Is the offering tested?
- How unique, valuable or interesting is your product or service offering?
- Is your intellectual property (IP) well-defined and protected?
- Do you have preliminary proof of concept and target market response?
What does the competitive landscape look like?
- What similar products exist?
- How many competitors are in the space?
- How is your product or service different from the pack?
- What are the challenges or barriers to entry?
- Does location create noteworthy competitive advantages
What is your go-to-market strategy?
- Have you identified a group of potential beta users for your product or offering?
- Have you worked with any notable partners?
- Are there early wins or success stories that validate your organization?
Think critically about how your business stacks up to the competition in each of these areas. Set your rose-colored glasses aside and be honest about strengths and weaknesses. Taking a deep dive on these value questions will challenge founders to assess where their business falls in the startup valuation continuum. Greater awareness about your company’s standing within the competitive landscape helps founders refine and better articulate the company’s value proposition to VCs.
Creating a list of investors and making your pitch
Having considered how to position your startup when pitching to VCs, you’ll want to curate and compare a list of investors who are active in your industry, stage and location. PitchBook makes it easy to identify and learn more about the venture capitalists who are leading these deals so that you can connect and create a compelling pitch that speaks directly to them.
To make a good first impression, you’ll need to be prepared with a clean, clear and quick articulation of the market you will serve and the problem(s) your company will solve. If all goes well and you receive a term sheet, that’s not the end of the conversation. There are important factors to weigh, and negotiations are expected.
Why is the term sheet so important?
As important as it may seem to get the highest possible valuation right out of the gate, getting the term sheet right is equally important. The term sheet is a nonbinding legal document provided by an investor to the founder that forms the basis of more enduring and legally binding future documents, such as the Stock Purchase Agreement and Voting Agreement. At its core, the term sheet is about setting up protections for each party and establishing who gets what.
The term sheet can be overwhelming for startup founders—all future negotiated terms will start there and the term sheet could have significant impacts on your business. In the next section, we’ll dive into questions to consider as you, your advisors, early investors and other vested parties work through the ins and outs of the term sheet.
What goes into the term sheet?
How do you determine equity and options?
- How much equity are you willing to give up?
- How much should you set aside for the option pool?
What is the VC’s track record and past performance?
- What is the VC’s track record?
- Do they invest in companies like yours?
- How much do they typically invest?
- How successful are they?
Are there any competitive conflicts?
- Have they invested in a competitor or potential competitor?
- Has a competing VC invested in a company like yours?
- Are they missing out on a growing new segment?
Does the VC’s portfolio offer synergistic opportunities?
- Are there potential opportunities for additional cross-collaboration—have they invested in companies or technologies that may be beneficial to you?
- Could your company provide additional benefit to companies they are already investing in?
All in all, it’s important to be very thoughtful in your approach. Though there will still be a lot of work and negotiation beyond the term sheet, careful consideration of future prospects and protections creates a firm foundation from which to grow.
More on venture capital investing
Get started on a target list of investors
Read our blog post about how to create a target list of investors with PitchBook
What is venture capital?
Check out this blog post about the ins and outs of VC
Break down the major differences between PE and VC
Discover where private equity and venture capital diverge in this blog post
See where VC focused its investments in 2021
Read our news article about the verticals that experienced the highest valuation jumps in 2021
