What Is Venture Capital Funding? Everything You Need to Know

UPDATED: May 20, 2024
PUBLISHED: May 25, 2024
person putting money in a piggy bank

There comes a point in every entrepreneur’s journey where securing financial backing is often the difference between a business’s success or failure. Among the myriad funding options available in the marketplace, venture capital (VC) stands out as a significant catalyst for innovation and growth. Yet, behind the allure of securing VC funding lies a whole host of intricacies and nuances that entrepreneurs must navigate to unlock their potential.

VC funding, popularized by reality TV shows like Shark Tank, is often characterized by monetary investment in early-stage, high-potential startups who are perceived to be industry disruptors. However, the journey from ideation to funding is a long one with lots of challenges. Understanding the ecosystem, its players and its dynamics is key for success—both for VCs and for businesses seeking funding.

Most companies go through different types of funding throughout their life cycle. The initial round, known as seed funding, involves raising capital to initiate the development of a business idea or a product. It can be self-funded or come from family, friends or even angel investors (people with a high net worth looking to invest in startups). After seed funding, some companies procure additional funds via Series A, B and C with VCs interested in injecting cash in exchange for equity (stocks) or partial ownership. 

Liza Rodewald and Erica McMannes met in 2014 as freshly uprooted Army spouses. In 2016, they co-founded Instant Teams, a remote team development company that provides flexible work opportunities for military families. They received seed funding in 2018 and 2020 and then subsequently raised Series A in 2022. 

Noor Akbari, CEO and co-founder of Rosalyn.ai, started his company in 2018 with a vision to democratize education with a proctoring AI that works anywhere regardless of internet speeds and bandwidth. Akbari spent two years securing seed funding, and today, Rosalyn has proctored over 500,000 exams for many institutions, including the U.S. Department of Defense, online education platforms, tech companies like Stripe and others.

Is VC funding right for you?

Michael V. Ledo is the founder and CEO of RISE Sports Advisors, a firm that guides athletes who aspire to be entrepreneurs, investors and community leaders—some of whom have gone on to invest in organizations such as SpaceX, Oura Ring and Turo. Ledo notes that not all VC firms will work with every type of entrepreneur. For example, RISE advisers look for founders with a proven track record of starting existing other businesses. “We fundamentally believe in the jockey, not the horse,” he notes. 

He further adds that everything starts with sourcing quality founders who meet the investment criteria for the portfolio followed by extensive diligence processes covering several areas such as backgrounds, legal, accounting and partnership terms. “Because of this, Series A investments are too early for us, as the risk profile is very high. We prefer to see entrepreneurs make it past Series A successfully with a clear plan for Series B raise.”

Venture capital funding depends on your goals

While there are many different factors to consider about external funding, it ultimately boils down to long-term business goals and operational strategy. “As a marketplace startup, we were at the inflection point of finding a product market, and we knew that to build this company to scale we would need outside investment,” Rodewald says. 

For Akbari, it wasn’t just a financial decision, it was also a strategic move toward scaling and fast-tracking his mission to democratize education. “We knew that to make a significant impact and reach as many learners and institutions as possible, we needed more than just cutting-edge technology; we needed the means to propel our solution into the market swiftly and effectively,” he stresses.

Ledo also points out that before seeking VC funding, founders must know the market and, more importantly, know their capacity without overestimating both. “Always make sure your values and plans are aligned with the VC’s goals before you partner with them.” 

Another aspect to consider is that many VC firms often extend their involvement beyond monetary investment. It’s quite common for a lead investor to assume the role of an adviser or board member, concentrating on offering support and fostering accountability through strategic planning, resource allocation and facilitation of customer or talent acquisitions. “The more capital you take, the more control you will lose of your business,” Ledo advises.

Tips for navigating the VC funding landscape

Navigating the VC landscape can be daunting, especially if you are a newcomer. Akbari outlines a guide on how to steer through:

  • Embrace accelerators: Accelerator programs act as launchpads and learning environments to help refine your pitch.
  • Seek mentorship: While there’s no shortage of startup advice, find mentors who have navigated your specific industry and can offer personalized guidance. 
  • Iterate based on investor feedback: Each question or objection from potential investors is an opportunity to learn and refine your strategy. 
  • Assess the founding team’s strength: The resilience, compatibility and combined skills of the team are crucial because, ultimately, investors invest in people.
  • Master the art of storytelling: Engage and inspire the audience by weaving a narrative that highlights the startup’s mission, vision and unique proposition.
  • Avoid one-size-fits-all advice: Focus on insights that are relevant and applicable instead of listening to generic advice.
  • Don’t go it alone: The journey can be tough, and going at it alone makes it tougher. Leverage networks and mentorships, and don’t shy away from seeking help.

How to get venture capital funding

Like Akbari, Rodewald also supports finding good accelerator programs. They were invaluable in the opportunities and connections they afforded her and McMannes. “Warm leads and introductions with investors are critical. Investors rely on trusted sources that can truly make a difference ahead of the pitch,” she advises. 

She also suggests “Raise as much as you can while you can” and get very comfortable with hearing “no.” It took her 76 “no” responses to raise $13 million in Series A and “each one required me to have tough skin with a deep commitment to believing in my business.”

Ultimately, the path to securing VC funding is a complex but rewarding journey. As both Akbari and Rodewald point out, it necessitates not only a robust business concept but also a strategic mindset, resilience and the capacity to captivate and motivate. It’s crucial to prioritize establishing a solid foundation, assimilating lessons from each interaction and consistently refining the pitch and business model. “Remember, success in the VC world is as much about the strength of your idea as it is about the strength of your resolve and the clarity of your vision,” Akbari advises.

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