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Raising VC: The Why, Who, What, When, Where and How

startup VCFor many startups, a lot of time is spent thinking about raising financing, be it from friends, family, angels or VCs. While capital provides the ammunition to grow, it can also be distracting and time-consuming for entrepreneurs, who also need to be focused on building and/or growing their businesses.

While are times when raising money makes complete sense, there are also occasions when the interest or lust about venture capital is unhealthy because it is seen as a sign that a startup has made it. The reality is it’s a key step along the way as opposed to being a major victory.

As I meet and work with more startups, it is fascinating to see how much entrepreneurs talk about venture capital so I thought it might be helpful to go through the five “W’s” and the “How”.

Why: It may seem like a straightforward question but startups need to ask themselves why they want to raise capital. Do they need to drive product development, build out a sales and marketing team, make a strategic acquisition, or move fast to keep ahead of growing competition. By answering this questions, startups can give themselves a solid foundation to start the fund-raising process because they know what they need it for.

When: This can be a difficult question because timing can be everything, and there are many different scenarios that would make it the right time to attract investors. For some startups, it can happen early to validate an idea or build a prototype. For other startups, venture capital is needed when a product has been developed and there are a handful of customers. With solid traction, a startup may believe the time has come to to press down on the accelerator.

Who: This is probably one of the most important considerations because there are different kinds of investors. Some are passive, some are strategic, some are hands on, some have extensive networks that can be tapped, some have the ability to handle or participate in follow on rounds, some can be patience and some impatient. At the end of the day, the money may be the same but finding right cultural and personality fit may be just as important.

Where: In an ideal world, Canadian startups could be financed domestically but given the not-ready-for-primetime landscape, startups need to look at other markets such as the U.S. and Europe. TeamBuy, for example, tapped European investors after finding little interest from Canadian VCs. An important thing to keep in mind is it can be challenging to have an investors who is more than several hours away by plane given it can make getting together time-consuming and less frequently.

What: So what is the money for? Closely related to “Why”, the what is crucial because startups need a clear idea of how to get the most out of the money they raise. One of the challenges after raising money is it can seem like it will last forever when, in fact, it can quickly disappear if you’re not careful. In particular, startups need to be careful about spending money on unnecessary frills. Instead, they need to spend on high-priority ideas that will drive growth and revenue.

How: This is also a key consideration. A startup could seek external help to go through the process, it could rely on its advisory board, or use an investment firm. For some startups, it may mean the founders are spending a lot of time on the road meeting investors and doing presentation. As I mentioned earlier, the process of raising capital can be distracting, which is why the how is so important.

More: ZurBlog has a post about the questions that startups looking for seed capital need to ask.

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  • http://www.lovethatfit.com gina@lovethatfit

    I am in the process right now and I agree completely it can be distracting. I have been seeking a seed round for about 1 month now. I exhausted friends and family and this round is to finish the technology and launch a beta. I actually just looked into Chile and Spain for financing. I am located in NYC and am a sole woman founder.
    Great article!!

    • http://www.markevanstech.com Mark Evans

      Gina: Thanks for the comment. I hope the search for funding goes well. Mark

  • http://bkvirendra.github.com/ Virendra Rajput

    Well we havent quite finished the prototype yet !
    But it will be very soon the we’ll be launching our Social Music app for IOS and Android phones.
    And we are already in the process of looking out for VC’s to present our prototype. As we are in a process where we kinda need funding.
    So it was actually a nice read for guys like us who are actually seeking and need to focus on the 5 “W”s

    • http://www.markevanstech.com Mark Evans

      Virenda: Glad you found the blog post to be a good resource. Good luck with the funding process. Mark

  • http://www.buzzbuzzhome.com Matthew Slutsky

    Missing: “What are you willing to give up?”

    One of the hardest decisions comes from the valuation of the company, and what you are willing to give up for the money.

    Great article.

    • http://www.markevanstech.com Mark Evans

      Matthew: Right, the “What, 1.1″. :) You’re right, that’s a definite question to ask. Thanks for the comment. Mark