Is Your Startup Actually Ready for Venture Capital?

Josh Leider, Head of Growth at Graphite

Updated 2023

VC funding is a highly attractive route to pursue as a startup looking to scale your operations. 

It can give your venture the runway it needs to scale and also outpace any competition. However, venture capital may not be the right choice for every budding startup.

Venture capitalists are aggressive investors who typically expect 10x ROI on their investment in 7 years. These VCs have no interest in unscalable businesses or startups with slow growth metrics. Instead, they seek explosive growth and significant ROI. 

Their selection process is intense as a result, leading to a mere 0.7% chance of securing funding. Given the aggressive ROI targeting, taking some time to determine whether venture capital is right for your startup is crucial. 

 

The Risks of Accepting Venture Capital Before You’re Ready

This is not to say that readiness to raise venture capital is an indicator of a “good” or “bad” startup. However, it’s important to gauge your business and understand if venture capital is right for you. 

Misjudging the timing of raising and accepting external funding can potentially be disastrous for a startup that’s not a good fit—and it can be a nail in the coffin for many organizations. 

As a general rule, if your business cannot potentially project a 10x growth rate in 7 years, you’re better off raising funds from other sources. 

 

How to Know If You’re Ready for Venture Capital

There are several specific questions that you should consider to determine if your startup is ready for venture capital. Let’s walk through all of the indicators of your readiness to raise venture capital, and see if your startup is ready for it. 

 

You Built a Consistent and Functional Business 

Your startup must have a solid foundation that will set it up for success. If this foundation is shaky, the extra influx of cash may merely be a bandaid—or could even exacerbate existing problems. 

As Charles Miglietti, CEO and Co-Founder at Toucan, a business insights firm, stated, “Raising money is not an end in itself. Ever. It’s a means of securing financing. A way to go faster. But it’s not a distinct marker of success.”

Some important considerations to help you determine whether you have a business that will be enhanced by venture capital (not rely upon it) are:

  • Have you identified target customers?
  • Did you already develop a strong brand identity?
  • Have you verified a product-market fit? 

If the answer to all of these questions is a confident “yes,” then your startup is likely ready for extra external funding.

 

You Have a Game Plan for Expected Funding 

Venture capital is only beneficial if used in an intentional and ROI-focused way. Before seeking funding, you should have concrete plans in place on where and how you will put the funds to use. 

There is no point in giving up significant equity in your organization if you have no idea what the funding is supposed to be used for. Having a well-thought-out game plan for the present and established goals and objectives for the money is highly recommended. 

To create this plan, you need expert revenue forecasts and a business roadmap detailing targeted goals and milestones. This not only makes your investments more likely to be fruitful but can also help you to receive venture capital funding in the first place. 

    Use our startup financial model template to create your game plan.

    Used by hundreds of the best startups

    Your Business Demand is Currently Above Available Supply

    Supply and demand are some of the core tenets of economics and business-building. And for good reason. Without the ability to fit within the current supply-demand context, great ideas may never see their full potential.

    An easy check to determine whether your startup is ready to accept venture capital and scale is if the current demand for your product or service outweighs the market’s ability to supply it. 

    If there is more demand than supply for your product/service, then it’s a great time to scale and you’re ready to bring in outside expertise and funding to help you reach the next level.

     

    You Understand Your Customer Base and Unique Value Proposition

    The most successful startups are built upon a firm grasp of what their customer base loves about their offered products or services. They deeply understand their customer’s needs, priorities, and challenges.

    This understanding gives companies the ability to deliver products and services that customers will always buy, even as markets shift. Consistency like this can lead to more positive, long-term projections. 

    And this scalability is exactly what makes a startup a prime candidate for venture capital.

     

    Your Business is Growing Organically via Word-Of-Mouth Referrals

    Consider your existing roster of customers. Are they so satisfied with your offers that they consistently refer new customers to your business? 

    If yes, it means your startup is growing organically, supported by your unique value proposition.

    While businesses would struggle to reach the next level and compete on the global stage through word-of-mouth alone, it serves as a positive case study for the possibilities for scaling your startup if given increased resources.  

    Venture capital could be the key to skyrocketing growth by providing funding for more expansive marketing and sales campaigns.

     

    Ready for Venture Capital Now?

    That’s great news! 

    The road to venture capital is not for the faint of heart. If you’re looking to start your journey, consider hiring an expert to help you sort out all of the tricky parts, so that you can focus on scaling your startup.

    Graphite is here to lend a hand! Our team of financial advisors, accountants, and outsourced CFOs have vast industry expertise and specialize in high-growth startups.

    If you’re ready for venture capital, we’ll share our expertise to streamline the process. Book some time with us.

    Need CFO or Accounting Help?

    Born out of a VC fund, Graphite fully understands the strategic and financial needs of high growth companies. If you need accounting support or simply have a question about accounting at your company, feel free to connect with us!

    What services are you interested in?

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