Funding Your App: Venture Capitalism
Yona GidalevitzAugust 06th, 20157 minute read
Yona is Codal’s Technical Writer. At Codal, he is responsible for content strategy, documentation, blogging, and editing. He works closely with Codal’s UX, development, marketing, and administrative teams to produce all manner of written content. In his free time, Yona is an avid guitarist, cook, and traveler.
A finance professor I had in college once told me:
"Venture capital is a bit like a choose your own adventure game—you never know what you're getting yourself into."
Having exhausted the seed capital that you've accumulated through previous funding rounds—such as through the friends and family round, crowdfunding services (such as Kickstarter & Indiegogo), bank loans, and grants—your small business may be confronted with the need for a capital investment.
You could go get another bank loan—a more substantial one, perhaps. There is another option, however: you could pitch your app to a venture capitalist (VC).
What is Venture Capital?
VCs regularly finance startups that could be a strong equity investment, especially in industries with untapped potential for expansion, such as the industry cloud. That said, VC funding can be some of the hardest capital to land. That's because it's risky business—investors never know for certain if they will earn a return on their investment (ROI).
The biggest risk taker in this type of equity investment is the venture capitalist. In fact, small businesses are neither obligated, nor expected, to pay back the investor, as they would be had they taken out a bank loan. You may be thinking: "awesome, there are no drawbacks to pitching a venture capitalist!"
Here's the catch: VCs invest in return for shares of the company, and sometimes a seat on the board.
And when you find articles like this one, it's no wonder that you're confused about the whole thing.
Consider this before pitching to investors
Who should I pitch to?
The Small Business Administration (SBA) licenses and regulates a network of private Small Business Investment Companies (SBICs), also known as private equity firms, who are guaranteed loans that can be used to boost the amount of capital that is available for small businesses.
"There are presently more than 300 SBICs licensed across the United States, with around a billion dollars invested annually in hundreds of companies. The program's success stories include major players like Apple, Costco, Intel, FedEx and Jenny Craig, to name a few"
- Entrepreneur: Taking Advantage of Government Venture Capital
If you're interested in taking advantage of government venture capital, consider checking out the Directory of Small Business Investment Companies, and utilizing the resources available in the SBIC Resource Library.
You also ought to consider contacting an angel investor—an individual of incredibly high net worth who seeks only high return investments through start-up companies. Angel investors, though incredibly picky, are a strong choice for start-ups who not only have confidence in their services, but also have faith in the idea that money follows the smart money.
That is, if you can get an angel investor on board with your idea, there is a high chance that other SBICs will follow suit. That said, landing an angel investor is no easy feat—good luck.
How should I craft an effective pitch?
Be ready. That's your best weapon and safety net.
SBICs and angel investors do not play around with their money, so they are likely to ask you lots of questions—such as, what do your customers need? How will you be successful? How strong is your team? How well do you know your competitors? What's your advantage? Who is your target market? What is your sales and distribution model? What is my money going to be used for?
The list goes on.
There is no secret formula to crafting the perfect pitch—the only true advice we can give you is this:Be prepared for any and all questions, and have confidence in your talents.
This article is part of our Funding Your App series. Read the other articles here: