Most of the time the founders we work with have a good understanding of venture capital and are ready to hit the ground running with their fundraising process. However, despite the polished pitch decks, diligently assembled data rooms and financial forecasts, we often encourage founders to return to basics to really sense-check that venture capital is the best route for them.

We know that VC funding can be an exceptional engine for growth, and can enable businesses to scale far more rapidly than they would otherwise. We also know that for many Deeptech startups, VC funding is a critical part of bridging the gap between research and development and their route to market. Startups supported by Digital Catapult have collectively raised over £500 million of VC and private funding, enabling them to scale rapidly. VC funding has also driven the success of many very well-known companies in Europe from Spotify to UiPath, as well as many Digital Catapult alumni ranging from companies like Flexciton to Humanising Autonomy. However, it is not the right route for every business, and pausing to answer a few simple questions early on can save companies months of wasted time and effort, and enable them to confidently confront questions that will inevitably surface later down the road of any fundraising journey.

Do I understand what VC fundraising means?

It sounds obvious, but the first question to consider for founders seeking VC fundraising is whether they understand what it really means. To raise VC funding means that both founders and investors have very high levels of conviction that the company could grow to a massive scale opportunity (often the target is a billion-dollar company), with clear exit routes to an acquirer or onto the public markets (IPO), in a timeframe that aligns with the returns profile of the VC fund itself. Without this, investment is unlikely to stack up even for the most innovative business.

Taking a step back and thinking about the VC business model can be a helpful way to illustrate this. Consider the objectives of a VC fund, which is (usually) for VC fund managers (General Partners or GPs) to generate returns in a specific time frame for their investors (Limited Partners or LPs). Investing in early-stage businesses is high risk, and some will unfortunately fail. So, as a result, Limited Partners require higher returns on their invested capital than the returns they could get if they put their money into the public markets. This means that VC funds have no option but to select investment opportunities that have the potential to generate massive returns (usually several times the return on investment or the possibility of returning the entire fund), within the horizon of their own fund return timeline. Fund economics forms the backbone of venture decision-making, but it is often forgotten.

Why am I seeking VC funding? What would happen if I didn’t?

Armed with knowledge of how VC funding works, the next question to consider for any startup is why they are seeking VC funding. Good answers to this question might be that a company has a vision to become a market leader, or create a new market, and has looked at the maths and believes that an injection of VC funding is the only way they can grow the business to the required scale. Another answer might also be that speed of product development and go to market is critical, and that without VC funding, it would not be possible to grow organically, defend their market position and take the desired market share to achieve their mission.

Bad answers to this question might be that a company thought VC funding was their only option, or that they thought it was ‘the done thing’ within the startup world and want to follow a well-trodden, often glamorised path towards VC funding. Founders that genuinely need to raise VC funding view it as one step in a long journey and not a mark of success in itself. The real success for a founder raising VC funding is achieving the growth they need to exit at a valuation that makes their hard work worthwhile and generates good returns for their investors. Once the funding is raised, the hard work begins! This leads to the final question founders should ask themselves.

Am I prepared for what it will actually be like to have VCs onboard?

The final question encourages founders to reflect on the reality of VC funding beyond the funding round. With such a high degree of focus needed for the fundraising process itself, it is often easy to overlook what life will be like beyond the initial fundraising. Founders need to be clear that with VCs onboard, the business might start to look and feel different. There will be new board members, and with that, new opinions on business strategy and direction. There will be reporting processes, milestones and future funding rounds. There will be expectations to grow quickly, to demonstrate profitability, and to answers needed when things do not go to plan.

Hard work and high growth go hand-in-hand. Due to the typical timelines to exit, founders and VCs will be working together for several long years, so it is important that founders see VC funding as a new long-term business relationship. Why mention all of this? There are huge benefits associated with bringing VC investors onboard, and those are well documented, but often the practicalities of what it means for founders don’t sink in until later on. At Digital Catapult, we’ve found that helping founders think about this up front, ensures that founders pursuing the VC path understand what to expect, and how to be successful in the long run.

With all these questions answered, founders can approach fundraising more confidently and are more likely to be successful in raising the funds they need from the VC funds they want to work with. The most successful VC and founder partnerships are the ones where founders have full awareness of the process, the implications, and the expectations from the outset, and there are no surprises waiting for them further down the road. Working with accelerators like Digital Catapult’s FutureScope programme can help founders think through some of these critical questions, as well as understand the wide range of funding options available to them. Startups have access to a series of Investment Masterclasses, as well as 1:1 investment office hours, and VC fireside chat sessions, and I encourage founders within the tech space to reach out if they’re unsure about which route to take.