Raise Capital for Your Venture Company

By Nicole Gravagna, Peter K. Adams

When growing your business, expect to raise money in stages. It’s not common to start a company and raise venture capital immediately. Instead, founders use their own money (called bootstrapping), raise money through friends and family, or take angel capital to develop a company to the point where a venture capital firm will be interested in the deal.

Structure Pre-VC deals

Early fundraising is a minefield because the decisions you make can potentially muck up your deal such that VCs won’t touch it with a ten foot pole. You can unwittingly strike a deal with some angel investors for a couple hundred thousand dollars that totally ruins your fundraising accounting for future deals.

The worst part is that such mistakes aren’t the result of someone setting out to ruin the company; they’re the result of the founder and investor not realizing the potential ramifications of the contract.

Discover how to plan deal structures in rounds leading up to a VC round. If you haven’t raised any money yet, use these tips to figure out how to raise early money wisely so that your deal doesn’t become too messy for VCs. If you have raised early money, use the tips here to clean up your deal so that VCs won’t be turned off.

Recognize the red flags

VCs are looking to see that your company can grow very large and can make a lot of money in a short period of time. They are also looking to see that you are not going to be a huge risk in their portfolios. Risk can stem from problems with your technology or from instabilities in the market.

Risk can also stem from the agreements that you made with individuals that invested in your deal early on. Although you can’t always control what happens in the market with competition and buyer behavior, you can control the terms of your early investment rounds.

Tons of variables exist in the pre-VC rounds, and many of the choices you make when structuring these early deals can have an impact on your future ability to raise money with a VC. Just a few of the red flags for VCs include

  • Having large numbers of investors (VCs prefer fewer investors who have invested larger amounts)

  • Investors who negotiated stranglehold terms

  • Including non-accredited investors in your capitalization table