6 Lessons Founders Should Know About Venture Capital Before Fundraising
Delving into the world of venture capital can be a formidable challenge for founders. This article demystifies the journey, offering clear-cut lessons from seasoned experts that illuminate the path to successful fundraising. Gain an edge with insider knowledge on what VCs really look for and how to strategically position your startup.
- VCs Expect 10x Returns Within 5-7 Years
- Educate VCs to Confirm Partnership Value
- VC Funding Requires Creative Control Assessment
- VCs Manage Portfolios, Not Just Investments
- VCs Invest in People and Ideas
- Focus on Revenue Before Seeking VC Money
VCs Expect 10x Returns Within 5-7 Years
One crucial insight about venture capital that founders often discover too late is that VCs typically expect a clear path to 10x returns within 5-7 years on any investment they make. This isn't just about greed - it's about the fundamental mathematics of venture fund economics.
This requirement stems from the venture capital model itself. In a typical fund, only about 10-20% of investments will generate significant returns, while many others will fail completely. Therefore, each successful investment needs to generate outsized returns to make up for the losses and still deliver acceptable fund performance. Understanding this helps explain why VCs might pass on businesses that could be quite successful by normal standards but don't have the potential for massive scale.
For founders, this knowledge should shape both their fundraising strategy and their pitching approach. If your business model realistically projects to become a stable $20-30 million revenue company, traditional VC funding probably isn't the right fit - and that's perfectly okay. You might be better served by angel investors, revenue-based financing, or other funding sources that align better with your growth trajectory. There's no shame in building a successful business that isn't venture-scale.
What this means practically is that before approaching VCs, founders should honestly assess whether their market opportunity and business model can support the kind of explosive growth VCs require. Your pitch should clearly articulate not just how you'll grow, but how you'll grow big enough to deliver those 10x+ returns. This might mean focusing more on your total addressable market, expansion strategies, and potential adjacent opportunities than on current traction or near-term projections.
Educate VCs to Confirm Partnership Value
One thing every founder should know before seeking venture capital is that VCs want to feel educated by you. They are seeking to place a bet on you, not just your company. Capturing their desire for knowledge helps to confirm that you are a great partner for them to "go into business with" by investing in you.
There are challenges to this approach: VCs hear countless pitches and pride themselves on staying informed, but the good news is that no one person can know everything and they are often generalists with gaps in specific areas.
Showing them something they didn't know about the market, technology, or customer behavior can set you apart and establish you as the expert they want to partner with.
The challenge is that VCs have seen it all, but here are three tips to help tackle this dynamic effectively:
- Share an insight about your industry or customers that only someone in the trenches could uncover. This immediately sets the tone that you bring unique value to the conversation.
- Simplify the complex, don't assume that educating someone means going into incredible depth and detail. In fact, going super deep is a mistake. VCs just need to understand your complex concept in a compelling way, often through a digestible narrative.
- Anticipate their blind spots by researching the VC's portfolio and focus areas. Tailor your pitch to address gaps in their knowledge or present a controversial perspective to build trust and position yourself as their go-to expert in your space.
By adopting this approach, you not only demonstrate your expertise but also position yourself as a valuable resource that VCs can rely on.
VC Funding Requires Creative Control Assessment
When it comes to venture capital, return on investment is what VCs are looking for. You may have a vision and you may be passionate about that and that may even procure interest from venture capitalists assuming your idea is good. However, if you're planning on taking venture capital, you need to have an honest discussion with yourself about how much control, creatively, you're willing to relinquish to venture capital firms.
If you get funding for two years and within the first six months haven't turned a dollar, be prepared for the investors to come in and want to change things and make improvements, which could look like you losing control over your vision. And although it may actually be helpful towards making your startup company profitable, sometimes a founder's vision is completely different than a venture capitalist's vision.
Venture capital has a price and you just need to make sure that whatever it is you're offering in return for money is absolutely worth it and acceptable for you. If the agreement takes away too much control or sets certain guidelines that you feel are too rigorous and you want to have full control over your company, consider bootstrapping.
Bootstrapping versus venture capital both have pros and cons but if there's no reason for you to take venture capital, meaning if your company can succeed without taking venture capital, then consider bootstrapping initially.
VCs Manage Portfolios, Not Just Investments
One thing every founder should understand about venture capital is that VCs aren't just looking at your business—they're managing a portfolio. Their decisions, whether it's how much capital to invest or when to push for an exit, are shaped by how your company fits into their broader strategy and risk profile.
This isn't a bad thing—it's just how the game works. But it does mean you need to approach the process with clarity. Don't just sell your vision; show how your business aligns with their fund's goals. For example, if they're focused on growth-stage SaaS, highlight your scalability and traction. If they're looking for moonshots, focus on your upside potential.
Equally important, understand that not all VCs are the same. Find one who shares your long-term vision, not just the one offering the highest valuation. The right partner can open doors, accelerate growth, and help you build something lasting.
Navigating the VC world isn't easy, but if you treat it as more than just raising money—if you think of it as finding a true strategic partner—you'll be in a much better position to succeed.
VCs Invest in People and Ideas
One thing all founders should know about the venture capital industry is that VCs invest in people just as much as they invest in ideas. While having a strong product and market fit is essential, what often seals the deal is the founder's vision, ability to execute, and resilience. VCs want to see that you not only understand your business but also have the grit to navigate challenges and adapt to changes in the market.
Understanding this can help founders navigate the funding process more effectively by focusing on building trust and credibility. Prepare to communicate not just your metrics but also your personal commitment to the success of the venture. Show them your strategic thinking, how you handle setbacks, and your long-term vision for growth. Building relationships with potential investors early, even before you need funding, can also make a huge difference.
Focus on Revenue Before Seeking VC Money
Before you chase VC money, make sure you can actually make money first. I've seen too many founders obsess over pitch decks while their business model is held together with duct tape and optimism. Had a client spend 100k on content for fundraising, burned through their runway, and crashed because they never figured out how to make real money. Focus on revenue first - VCs want to pour fuel on a fire that's already burning, not help you figure out how to light the match.
