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Understanding Venture Capital

Venture Capital (often shortened to VC) is a type of private capital seeking high returns from investing in fast-growing businesses with a large potential market - think software or biotechnology. VC investors are hands-on, supporting the founders in whom they invest with expertise as well as capital.

Isha Sharma, Impact & Sustainability Manager, Octopus Ventures
Isha Sharma, Impact & Sustainability Manager, Octopus Ventures

The road to investment can be long and hard when you’re building a business. Relentless networking, cold outreach to ventures capital investors (VCs), industry summits and events are only a small part of the journey to securing funding. And that’s all before you get that 30-minute window to convince them you’re the company worth betting on! Don’t let the journey sway you. There’s plenty of investment available – you just need to make sure you’re approaching the right funds at the right time. Here are a few tips to get you started: 

What are your growth goals? 

Venture capital is looking for some form of return on their investment and will take equity in return for the funding they provide. It’s worth noting that VCs looks for big returns on their capital, meaning they will want your start up to have the ability to be worth huge amounts of money when they sell their shares in the future (usually because your business has been sold or it’s joining the stock market). If you’re not looking to build a unicorn (a privately-held company with a valuation over $1bn) or your business model and total addressable market don’t lean toward unicorn-status, then VC might not be the best fit for you. 

Get to know your investor 

Your time is valuable so you don’t want to waste it looking for investors in the wrong place and pursuing the wrong people. Work out who the right investors are for you. They are the people investing in your industry and in businesses of your size. Here is a great resource to help you get started: Techstars Investors in Europe Database

Once you know who you want to reach, work out where you can find them – what events will they be at, what panels are they speaking on? Turn up and start networking. VC investors tend to be arch networkers so if you meet enough people, you’ll eventually start to get the connections you need. 

Next, get to know the investor before you start fundraising. Do some digging to find out whether the VC is a generalist firm or has any specialisations. For example, some firms will solely focus on tech over product, software, health or biotechnology and they should state it quite clearly on their websites. 

Understand the difference between angels, venture capital and private equity. And learn what pre-seed, seed and Series A investing means to each firm. Angel investors tend to be more interested in pre-seed and seed round funding. VCs typically invest in Series A and beyond, though some VC firms may have pre-seed funds. It’s worth tapping into these firms and building relationships earlier on. Although VC is a form of private equity, the main difference is PE typically focuses on financing more established companies whereas VC looks to support start-ups and other businesses with the potential for substantial and rapid growth. Typically, this means tech startups. If you do not fit the tech-mould, save your time, look for the VCs that fit your business model. 

Appreciate the pros & cons 

Venture Capital allows you to focus on building the right product whilst growing your revenue. You are able to draw on your VC’s expertise and network and you won’t have to pay back the investment. But in return, you will dilute your share of equity and the investor may ask for a seat on your board which allows them certain voting rights or a say in the direction of the company. That being said, a good investor will understand there is a fine balance, and their job is to support the founder’s vision rather than trying to re-create a new one. 

Relentless grit (even when the going gets tough) 

My final piece of advice is to believe you are the company worth betting on. Self-belief is a powerful tool, and it will go a long way to setting you apart from others in the market. After all, venture capital looks to invest in new ideas or emerging companies that they believe have high potential for growth, and you are often the face of that idea. The VC is essentially betting on you. 

Whilst I appreciate that might sound obvious, sourcing investment can take its toll. Most founders will cite this as the hardest part of their journey. So, it is important to constantly remind yourself of your mission and believe whole-heartedly in your ability to deliver it. 

Sourcing investment can take its toll. Most founders will cite this as the hardest part of their journey. So, it is important to constantly remind yourself of your mission and believe whole-heartedly in your ability to deliver it.  

Isha Sharma, Impact & Sustainability Manager, Octopus Ventures

For more insight on getting VC investment, see the below additional articles from some of my colleagues.