How Do Startups Get the Attention Of Venture Capital Firms?
Some of the world's most influential technology companies started out with venture capital ("VC") funding1. What is venture capital? How much venture capital funding is each round of investment? Read on to understand how venture capital works and how to apply for it.
What Is Venture Capital ("VC")?
Venture capital is one way for startups to raise funds. Startups can sell their shares in exchange for capital and comprehensive startup support, such as mentorship from experienced entrepreneurs, partnerships, and access to networks, in order to pave the way for the startup's success and nurture gradual growth2.
The operation of each venture capital fund is definitely different. Take the Hong Kong Government's "Innovation and Technology Fund" as an example, the fund operates through a partnership model between the Innovation and Technology Commission and private investors, at a ratio of 1:2, investing in eligible startups3. Eligible companies are not restricted by business category and industry for a venture capital funding opportunity. There have been numerous local success stories from companies in various industries, ranging from supply chain management, e-commerce, and fintech, to biotechnology and AI, etc. But they all have one thing in common - their focus on driving innovative and technological development3. The scale of the venture capital investment depends on the company's developmental stage and transaction type. For the earliest seeding stage, each venture capital investment typically ranges from US$1 million to US$5 million2.
What Is The Purpose Of Venture Capital?
Venture capital enables entrepreneurs to realise their ambitions, with investors directly injecting new capital and alleviating the pressure of capital flow in the early stage of entrepreneurship. Having venture capital partners as support can enhances a startup’s creditworthiness and this can open the door to business expansion2.
For investors, venture capital is another option for investment that can generate returns in the future by nurturing companies that possess potential but have not yet generated significant profits4. Venture capital investors are typically large financial institutions, high-net-worth investors ("HNWI") and wealth management organisations4. Companies that are responsible for approaching startups and managing venture capital funds are called venture capital firms. These venture capital firms usually hold less than 50% of the shares of a startup's equity; they also offer business strategy assistance, aiming to maximise the value of the startup and obtain profits by exiting the investment through a sale of stakes or via an initial public offering ("IPO")4.
Venture Capital Funding Stages
From coming up with a startup idea to nurturing it to fruition, a startup company experiences different stages of development. At the earliest stage, a startup may rely on the founder's personal capital, support from their friends and families, or early-stage investors (“micro-venture capital”) for funding to establish their business5. When a company is able to demonstrate its development potential to a wider audience of investors, it can officially enter the venture capital stages:
- Seed round funding: this is usually the first capital injected into a new company by friends, family members or angel investors. With this start-up capital, the new company can conduct market research, form teams and product development, etc4.
- Early-stage funding: this stage encompasses Series A to Series B financing, with different investment targets and fund usages at each stage. Companies receiving Series A funding are mostly in the start-up phase, with a smaller customer base and a business plan that has passed the feasibility analysis that classify them to have development potential. Companies receiving financing assistance at Series B funding may have more room to expand their target audience base4.
- Late-stage funding: startups that have entered Series C or beyond have achieved short-term success and obtained sufficient proof of viability and growth in the market, thereby gradually preparing for an Initial Public Offering4.
Seeking venture capital funding is just one way to secure initial private equity and capital during a startup's early development stage4. Besides venture capital, depending on the growth of the company, some entrepreneurs may seek out other sources of capital at this stage, such as startup incubators and angel investors. For many startups, after multiple rounds of financing, the final stage of venture capital will be an initial public offering ("IPO") or an acquisition. This also signifies a new chapter for the company's development and its progress towards becoming a well-established enterprise4.
What Are The Steps For A Venture Capital Application?
The venture capital application process can be divided into four steps, namely initial evaluation, initial negotiation, due diligence, and final negotiation and completion2. During the due diligence stage, the applicant company may be required to undergo an independent investigation regarding its business plans, financial plan, products, and technology, offering an in-depth insight into market information, such as competitions and distribution networks, for the investors2.
The Ecosystem Of Venture Capital In Hong Kong
As of the publishing of InvestHK's 2022 Startup Survey early in 2022, there were a total of 3,985 startups in Hong Kong3, with government-backed venture capital funding exceeding HK$100 billion3. To obtain venture capital funding or other forms of grants and corporate partner sponsorship, you should pay attention to various startup challenges or venture capital competitions from the government, universities and the business community. Here are some venture capital funding and startup competitions in Hong Kong3:
- "Innovation and Technology Venture Fund" ("ITVF") from the Innovation and Technology Fund ("ITV")
- "Research, Academic and Industry Sectors One-plus Scheme" ("RAISe+") from the ITV
- "HKSTP Venture Fund", "The Ideation Programme", "Acceleration Programme" from the Hong Kong Science and Technology Parks
- "Cyberport Accelerator Support Programme", "Cyberport Macro Fund" from Cyberport
- "Elevator Pitch Competition", organised by the HKSTP
- "Jumpstarter 2023 Global Pitch Competition" by the Alibaba Entrepreneurs Fund
- "Start-up Express" by the Hong Kong Trade Development Council.
Tips For Getting Venture Capital Funding
How can venture capital applicants impress and stand out from the crowd when faced with venture capital firms' investors and business veterans? Preparation is key! When drafting your venture capital business plan, why don't you give these questions some serious thoughts5:
1. Business Solution and Value5
What kind of market needs is your venture capital proposal addressing and what value does it bring to the marketplace?
2. Prove of Market Demand5
Even though your product can solve certain problems, are people willing to pay for it?
3. Uniqueness5
Is your product easily replicable? Is it unique in the market?
4. Scalability of the Business5
Investors in venture capital firms aim to make money, and business expansion is the key to making profits. Does your business have the potential to grow continuously?
5. Propose a Foolproof Exit Strategy for Investors5
For investors, the ability of your company to go public in the future and the potential appreciation of company stocks is directly related to their investments returns and earnings. As you demonstrate your entrepreneurial vision, offering a comprehensive and profitable exit strategy for investors can enhance your chances of receiving an investment.
Are you planning to approach venture capital firms, obtain venture capital, or starting a new business? DBS SME Banking is here to provide the necessary financial support you need to start your own business.
The above information is only for your reference. For detailed information, please refer to the sources and seek professional advice if necessary.
Article published on 17 May, 2024
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