If you decide that venture capital (VC) funding is a good fit for your small business, you’ll first need to determine the value of your business, decide the amount of funding you need, and prepare your pitch to investors. Once you have the details of your presentation worked out, you will need to locate potential investors and present your pitch.

When you have interested venture capitalists, you will start negotiating the term sheets for the funding. The venture capital investors will then go through a thorough due diligence process to further evaluate your business. If your business passes, you then close on the deal and receive funding.

Step 1: Determine Business Valuation

Your business valuation and the size of your venture round are interlinked. Venture capitalists prefer to take a set percentage of a company in exchange for funding. Therefore, the higher your valuation, the more money you could raise. However, the valuation of your business is largely out of your control when it comes to raising venture funding.

Even if you use a professional appraiser to determine the value of your business or use statistical models to value your business, these valuations may become irrelevant once you begin negotiating with venture capitalists. You can do some research and use financial models to calculate your business valuation. The precise manner of determining what a business is worth varies by business and by industry. In general, consideration is given to the age of the company, how fast it’s growing, leadership, revenues and cash flow, patents, and user or customer base.

If you’re already an established business with sales and revenue, estimating a valuation is possible using traditional methods. The three most common methods of determining business valuation are:

Net asset valuation: This method involves adding up the value of all of the assets on your balance sheet and subtracting any long-term debt. This is usually not a great method for venture capital since investors are more interested in the future cash flows of your business.

Profit multiples : Assuming your company is profitable, you could use a multiple of your annual profit. The usual metric is earnings before interest, depreciation, and amortization (EBITDA). However, the multiple is largely affected by the future growth of EBITDA, which can be highly speculative.

Discounted cash flow: Discounted cash flow uses your projections for future cash flow and discounts them using interest rates to come up with a value. This method can be difficult due to the highly speculative nature of forecasted cash flows.

For most venture deals, traditional valuation methods aren’t effective. Every business is different, which makes it difficult to come up with a general formula for valuation. Valuation is often a combination of how much a company needs, how much equity in your company you’re willing to give up, and how much the venture capitalists are willing to pay for that equity stake. Ultimately, your company’s real value is whatever the market will pay for it.

Step 2: Determine Funding Need

Instead of predetermining how much you should raise, it’s better to have a series of plans that vary based on how much you raise. Start with a minimum investment amount that will significantly change the risk profile of your company. This could be an annual revenue number or a new version of your product. Then have contingency plans if you can’t raise the minimum amount or if you raise more than expected.

The amount of money you should try to raise is determined by several factors including:

  • How much capital you need for your business
  • The current stage of your business
  • Valuation and dilution preference

Dilution is how much ownership in your business you will give up to new investors. The less you raise, the less you need to give up. For instance, if you want to raise $2 million but don’t want to sell more than 20% of your company, you’ll need a valuation of at least $10 million. For initial rounds of venture capital, it’s not uncommon for VCs to want to purchase at least 20% ownership of your company.

Step 3: Put Your Pitch Together

Every business is a little bit different in terms of what’s needed to prepare for a venture capital round. In general, most companies will need to prepare a business plan, pitch deck, and product demonstration. Additionally, you may be asked to provide detailed product documentation and references to your potential investors.

Business Plan

A strong, detailed business plan is a great asset to your business, whether you’re seeking venture capital or another source of financing. There are software tools available, such as LivePlan, that simplify and speed up the process of writing a business plan.

When seeking venture capital funding, a well-executed executive summary is important because VCs see hundreds of plans regularly, so they will most likely not read your whole plan. They will likely skim the summary and see if it warrants further reading. Your summary should be concise but compelling. You don’t have to stick to a fully written-out format. If charts, tables, or graphics convey information more precisely, it’s appropriate to use those.

Pitch Deck

Your pitch deck is part of the introduction potential investors will get to your business and should be tailored to the specific investors to which you’re presenting. Having a well-put-together and professional-looking pitch deck can be crucial to securing venture capital funding. The average pitch deck is roughly 19 pages or slides covering numerous details about your business proposal. Your pitch deck for venture capital funding should address the following:

  • What problem your product or service solves : By explaining the problem, you will set the stage for how your business is aimed at filling a gap in the market. The problem should address a common pain point that’s relatable to the investors.
  • How your product or service is the solution : Explain how your product solves the problem, explain why the timing is right, and give examples of how your business, as a solution to the problem, is scalable.
  • What the market looks like: Define your audience and show investors the market potential that your product or service has. Include information on the current market and the potential growth of the market.
  • What your product is : Share data highlighting the key components that make your product unique and answer the problem. To help prove its value, include quotes or testimonials from those that have tried your product.
  • How your product or service is performing and traction for further growth: If your product is currently on the market, you must show investors how it’s performing in a month-to-month breakdown. For products that are still in development, you will want to show a projected growth trend for your business.
  • Who is on your team : One of the most important slides in your pitch deck is the one that tells investors who you are. List members of your team, their educational and experience background, and what they bring to the company. Investors want to know the people they’re backing.
  • Your competition: You’ll need to identify who your competitors are in the market and what sets you apart from them. You want to show investors what makes your company unique to those already in existence.
  • Projected financials: You should present three years’ worth of financial projections. Try to remain realistic yet conservative in your projections. You don’t want to over-promise and under-deliver on financials. Be prepared to provide justification for those projections.
  • Amount of funds needed: When presenting the amount of funding you’re requesting, state the amount as a range rather than a fixed amount. Many investment groups have a limit to the amount they will provide to one investment opportunity. If your stated amount is higher than what they can offer, it may rule your business out as an investment.

Product Demonstration

To get venture capital investors to understand your product, there’s no substitute for showing them. A prototype is acceptable, but an actual working product is much better. When demonstrating your product, it’s important to exhibit how it solves a problem for your customers. This will set up the 10x value proposition―how you’re 10 times better than any competing solution out there.

Detailed Product Documentation

Getting VCs to have serious interest requires you to provide considerable analysis of your product or service. Documentation should include the manufacturing, distribution, customer service, and product support processes. Focus on key risk areas. Anything that’s new or novel is going to get close scrutiny. Also, anything that customers will seriously care about, such as security or quality, should get special attention in your product documentation.


When evaluating your business, venture capitalists will ask you to provide references. These references will include personal references for the senior management team as well as customer or prospect references. Keep in mind that you may be speaking to dozens of firms that will want to speak to your references. To avoid burdening your customer references, you should have enough available that you’re not sending all the prospective VCs to the same people.

Step 4: Target Venture Capital Investors

Once you have all the pertinent information about your business assembled, it’s time to begin searching out potential investors. You’ll begin by making a list of potential investors and prioritizing the list. Having identified those you feel are most likely to invest in your business, you can begin making the necessary connections to enable you to present your pitch.

Make a List of Potential Venture Capitalists

Most venture capital firms invest in a specific business segment. These segments are often defined by the current business stage, the type of business or industry, or the geographic location of the business. Venture capital segments typically include:

  • Investment stage: Venture capital investors tend to segment themselves into various investment stages: early stage, middle, and late. Each round of financing that involves professional investors is referred to as a “Series.” Series A is usually the initial round, Series B is for larger raises to scale and grow, and so on. The actual letter is an industry norm of distinguishing one round of fundraising from the next. Venture capital investors will often define themselves by which series or stage they tend to participate in.

  • Location : While it might seem not important, location does matter. Venture capital investors often want to be able to connect in person frequently. Your chances of raising money are much higher with investors that are close to you.

  • Industry : Venture capital investors tend to gather industry expertise as they invest. Sometimes they have raised a fund to address specific market opportunities. Visit each potential investor’s website to see which ones cover or focus on your particular industry. The better the match, the higher your chances are of being funded.

Prioritize the List

After identifying a list of nearby investors with the right stage and industry focus, you should prioritize the ones that appear to best fit your business. In all likelihood, you’ll eventually reach out to everyone on the list, but initially, you should begin with the ones most likely to invest in your company based on their past funding history.

Network Your Way Into Meetings

Starting at the top of your prioritized, targeted investor list, you need to network your way to them. Cold emailing or calling venture capitalists is neither an effective nor a good use of your time. Very few venture capitalists will source a deal that way. Many see it as a red flag if a CEO can’t network their way to them. Some ways to network your way into meeting venture capital investors include:

Introductions : The most preferred way to get to a VC is a mutual introduction. Scour your personal and professional networks. Get on LinkedIn and see how they’re connected to you through the people you know. Your goal is to get a warm introduction with the fewest possible degrees of separation.

Competitions or accelerators : Another way to get in front of venture capitalists is through competitions or accelerators. These vary by industry and could be university-related, incubator-related, or completely independent.

Public relations: Whether it be through a high-profile article about your business or a successful Kickstarter campaign, good public relations is another means to get your business in front of the eyes of potential investors.

Step 5: Negotiate

Once you have found a potential VC to partner with, negotiations take place. Term sheets are preliminary legal agreements wherein the major terms of a venture capital investment are agreed to before signing an actual share purchase or equity agreement. There are two sets of terms that are generally negotiated as part of the term sheet related to economic and control issues.

Economic Issues

The typical economic issues negotiated as part of the term sheet include:

  • Pre-money valuation: The pre-money valuation is the value of the company before investment funds have been added.
  • Post-money valuation: This is the pre-money valuation of the company plus new investment.
  • Investment type: The investment will most likely be in the form of convertible preferred stock. The preferred part means that preferred shareholders are first in line to be paid before common stockholders, including you. The convertible part means that at some predetermined time or event, the preferred stock automatically converts into common stock.
  • Stock option pool: A stock option is a right given to the holder to buy shares in a company at a predetermined price. When the value of the company goes above the option purchase price, the holder makes money. Venture investors like motivated employees, so they usually will require an option pool to be held aside to give to current employees and to attract future employees.

his is an example of how a company’s valuation could be determined through negotiation.

Control Issues

The major aspects of company control that are negotiated as part of the term sheet are:

  • Liquidation preference: This allows investors to receive a certain amount of money back, before common stockholders, in the event the business is sold.
  • Antidilution protection: This protects investors if you raise additional money later at a lower valuation. This protects the investors from having the value of their investment reduced.
  • Board seats: Venture investors will require a seat on your board of directors. There are two factors that get negotiated: the number of board seats and the overall size of the board. The higher percentage of seats the investors have, the more control they’ll have for major issues that require board approval like future financing terms or the sale of the company.
  • Protection provisions: Investors will want protective rights to control specific business activities. Examples of these rights include such aspects as the sale of the company, issuing new shares, large purchases, or option grants.
  • Expenses: Businesses are often expected to pay back the costs incurred by the venture capital firm to execute the deal. These can include legal, consultant, travel, and other expenses.

Step 6: Proceed Through Due Diligence

Upon agreeing to a term sheet, a lengthy process of due diligence on the part of investors starts. It’s best to get prepared for this process in advance so it goes as quickly as possible. While actual due diligence questions will vary depending on the type of business you have, you should be prepared to answer questions regarding:

  • The market and competition
  • Your team and your company’s business culture
  • Your finance and human resources (HR) systems
  • Your current and potential customers
  • Product development plans
  • Sales and marketing plans
  • Any legal contracts your business has entered into

Tips to Streamline the Due Diligence Process

A few things you can do to help make the due diligence process goes as smoothly as possible include:

  1. Create a virtual data room : It’s a good idea to keep a data room or a file sharing service so investors can access and return to documents in an organized way.
  2. Be proactive : Identify each of the people at the venture capital firm that you’ll be interacting with and what they’ll need. Proactively send the required information to them. If any questions arise, err on the side of over-communicating.
  3. Maintain your own tracking system: Keep a checklist of what has been sent, to whom, and when. You should also keep track of when a process has been completed so you can move the overall process forward as fast as possible.

Step 7: Close the Deal

When all of the terms have been negotiated and you have passed the due diligence process, it’s time to close the deal. The closing will involve many legal documents prepared and reviewed by attorneys for both parties. Once the documents have been executed, you’ll receive funding from venture capital investors. Here’s a list of common closing documents:

Investment agreement: Describes all material terms and conditions, including financials, forecasts, and other historical information.
Stock purchase agreement: This is the legal sale of shares to investors and details the purchase prices, closing date, shares to be issued, representation, and warranties.
Amendment(s) to the bylaws : This creates a new class of stock and documents all of the shareholder rights negotiated in the term sheet.
Voting agreement : This agreement contains any rights of first refusal to buy new shares, stock transfer restrictions, and the requirement for common shareholders to elect VCs to the board of directors.
Indemnification agreement: The company agrees to hold harmless the board and investors should a third party sue the company.
Certificate of incorporation: All classes of stock must be detailed in the company’s certificate of incorporation.
Legal opinion: This is a letter sent by the company’s attorney to the investors validating the legal formation of the business, the business’s power to conduct business, legal issuance of stock, and other relevant legal review.
Employment and confidentiality agreements: Intended for senior management, this document defines obligations, compensation, grounds for termination, noncompetes, and more.
Some documents may be combined or configured differently depending on the preferences of the attorneys involved. However, all of these elements will be covered in the closing documents that are executed.

by Tom Thunstrom . Tom has 15 years of experience helping small businesses evaluate financing options. He shares this expertise in Fit Small Business’s financing content.

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