Even the greatest business idea won’t come to fruition without funding. Most entrepreneurs don’t use their own money to kickstart or grow their ventures, but instead, turn to venture capital (VC) funding.

As part of the EWOR Academy, our CEO Daniel Dippold gave a lecture on the basics of VC fundraising. A successful serial entrepreneur, Daniel has vast experience with funding options.

In this article, he’ll teach you the ins and outs of VC funding to help you prepare for pitches to investors.

VC Funding vs. Bootstrapping

Every single funding round demands a decision on the type of funding that you want.

In pre-seed stages, venture capital funding and bootstrapping are the most common options. In other words, you’ll either get VC money or you have the means to invest in your own project.

Noam Wasserman coined the concept of “Rich v. King” as the fundamental founder dilemma. This dilemma describes the tension between growth (rich) and control (king). To find out more, check out his book detailing these concepts here.

 If you go for VC funding, you’ll have faster growth and more resources, but you’ll also have to give up some control. If you bootstrap your business, you’ll have full control with slower growth.

There is no universally better option between the two because the choice depends on your preferences and goals. Every founder has to ask themselves what their priorities are when it comes to shareholders and profit.

What is more important to you between growth and control?

Are you going to build your own legacy? Do you want to be your own most creative self without any other shareholders involved? Or, do you want to make the biggest impact in a short amount of time?

Answer these questions for yourself before choosing your funding path at each stage. Although VC funding vs. bootstrapping involves more than growth and control, these two elements are at the heart of the decision..

Venture Capital Funding in Numbers

Let’s look at some statistics before we dive into the theory of venture capital funding. These numbers apply to the United States’ VC world, but there are similar circumstances in Europe.

  • 0.1% of US businesses receiving money gain it from VC funding.
  • The quantum of venture capital funding of all funding is around 10% in the US.
  • Combined revenue of VCs in the US is around 20% of GDP.
  • Fewer than 1% of companies seeking VC get it.
  • 95% of VCs generate returns lower than the VC-risk justifies.
  • Roughly 80% of VC gains come from 10% of investee companies.
  • For those that do receive funding, it takes between 6 and 12 months on average to get VC money. It requires the equivalent of one founder working full-time on fundraising during that time.
  • The majority of companies receiving VC money fail.

In short, scoring a VC deal is hard and it doesn’t guarantee success.

Don’t let these statistics discourage you from pursuing this funding opportunity. Use them to motivate you to create the best pitches if VC funding is something that makes sense for your company.

Early Founding Risks and Venture Capital Funding

Let’s apply the abstract “Rich v. King” dilemma to practical early founding decisions. What aspects of growth and control are worth considering?

Go through these considerations before making a final decision on what to do in a funding round. Just as importantly,  align with your co-founders and pick the right choice for your start-up.
If you are already in a VC contract and later decide you want something else, it will be too late to change.


Growth Considerations

Time to Market

If you’re in a competitive industry, use VC funding to give you an edge and bring your product to the market sooner.

Market Monopolisation

Go for VC funding if you want quick monopolisation and high growth in competitive markets. Use your VC’s resources to increase your chances of monopolising the market through faster marketing.

Second Mover Advantages

Since you need a lot of funding as a second mover, go for VC money in this case. Second movers make for great pitches to investors because you can point to previous companies and convince them that you can do it better.

Value / Time

There is more acceleration potential when you can quickly raise money through VCs. You can use this quick growth to plan an exit and then use that money for a second company. The usefulness of this idea depends on your product and goals.

Employee Pay

It’s impossible to bootstrap if you need to pay highly educated or motivated employees. Especially in niche markets, you’ll usually have to settle for less professional employees to kickstart your venture.

ESOP

The employee stock ownership (ESOP) strategy is only interesting for VC funding routes. This system motivates employees through an extra incentive that bootstrapped ventures don’t do.

Control Considerations

Scalability of the Business

If your business is not scalable yet, you won’t get VC money and you’ll need more time to scale it.

Founder CEO Replacement

It’s a common occurrence for VCs to replace the founder in their CEO position. Go for bootstrapping or other funding options for more control.

Managing Growth

It’s difficult to manage the high-growth demands of venture capitalists. They want to maximise profits at all times and create intense pressure on young, inexperienced founders.

Go Big or Go Home

Consider if you want steady, decent growth for your business or if you want to have a huge impact through VC funding.

Funding Rounds Terminology

Funding terminology can be overwhelming at the beginning of your entrepreneurial journey. Here’s a timeline of VC funding rounds and their respective terms:

Venture Capital Fundraising

Pre-Seed

This is the idea stage of your venture’s journey. At this point, it’s unlikely that you have a marketable product, but instead still work on prototyping. You haven’t completed your customer discovery yet and are looking for initial funding to kickstart your venture.

Seed

At the seed stage, you’ll have a product market fit and interact with your first customers. Your venture generates the first revenue streams and there’s a clear growth trajectory. The actual progress at this stage depends on your product and industry.

Series A

At this stage, your funding efforts serve an aggressive growth strategy through VC money. It’s the first fundraising round after an initial expansion during the seed stage.

Series B

During a series B funding round, you’ll either fund the road to initial public offering (IPO) or prepare for an exit.

Series C

It’s possible to go for a series C round and secure even more VC money to launch IPO and stocks. This depends on your venture’s journey and industry.

The Venture Capital Funding Cycle

Venture capital funding is a long process with different stages. Consult the overview below to gain an understanding of what’s ahead if you choose the VC funding route.

Venture Capital Fundraising

Preparation

The first stage can take up to two years and includes the preparation of limited partner (LP) agreements. It can also involve a private placement memorandum.

Marketing

The marketing stage of the venture capital funding cycle serves to create a sales story and market the fund to LPs. During this process, you’ll receive your first investments.

Commitment

After receiving the funds, use them to invest in your company. It usually takes around ten years to give LPs their money back and, thus, fast exits make venture capitalists happy. Investors won’t invest in you if they see you won’t be able to pay them back within four to six years.

Follow-Up & Divestment

At this stage, VC investors might make follow-up investments and divest the first investments.

Term Extensions

The final stage of the VC funding cycle is term extensions. At this point, the VCs extend the fund to optimise for total returns (TR) and the internal rate of return (IRR).

Venture Capital Funding – Bottom Line

The venture capital funding cycle is long and complex, with the promise of high-growth ventures and a fast impact in the target market. VC money is a great financing option for founders who want to collaborate with driven investors.

About the author
EWOR Team

EWOR is a school conceived by Europe’s top professors, entrepreneurs, and industry leaders. We educate and mentor young innovators to launch successful businesses.

Sign up to our Newsletter