The Ins and Outs of Venture Capital Funding

07/08/19 | 7 MIN READ Revised 09/23/21

Venture capital funding has proven to be highly beneficial at helping entrepreneurs grow.

Innovation and entrepreneurship has fostered a myriad of technological advancements over the years that have facilitated the betterment of healthcare, medical technology, and human life. However, even the most skilled and forward-thinking entrepreneurs need some help along the way if they want to continue to innovate and thrive for years to come. A common method for supporting these entrepreneurs and startups is through venture capital (VC) funding, which has proven to be highly beneficial at helping entrepreneurs grow while also increasing their likelihood of success.

🔬 Learn about: Funding Options for Biotech Startups

While not every entrepreneur or startup that receives funding from a venture capital firm goes on to be successful, many within the healthcare and medical technology industries have provided the VC firms with exceedingly high returns on the initial investment. While venture capital funding can be provided at any stage of building a company, VC funds are typically given to entrepreneurs and startups within the expansion stage of growth, which usually leads to rapid growth in both cash flow and revenue. These types of investments help to provide stability to a new or expanding business that has demonstrated a high potential for growth.

Venture capital firms are comprised of two main elements, which include general partners who make the investment decisions and limited partners, the latter of which can involve individuals and organizations that provide the necessary capital for the investment. Understanding how venture capital funding works is the first step for obtaining this funding and determining whether this type of funding is necessary for your company.

🔬 Find out more about: Investor Engagement Strategy for Funding Life Science Startups

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How Venture Capital Works

Venture capital is a type of private equity wherein funding is provided by a firm to smaller companies that are in the early stages of growth. While venture capital firms can provide this funding at any stage of a company's growth, they primarily focus on startups and companies that already have a viable product. What these venture capitalists are provided with in return for their funding are equity shares within the company, which essentially means that they take limited ownership of the company.

While venture capitalists are taking on a high amount of risk when they decide to invest in a small company or startup, they do so because it's possible for them to earn an enormous return on their initial investments. These firms conduct an extensive amount of research on any company they consider investing in, which helps them mitigate risk over the long run of their investment. However, venture capitalist firms still have a high rate failure with their funding because of how difficult it is to predict future success for an unproven company -- because of this high rate of failed investments, VC firms typically invest in many startups in hopes that the successes outweigh the unsuccessful investments.

For any startups that require funding to start, grow, or expand their business, VC firms enable these companies to achieve their goals by providing the funds that they require to take the next step forward. In order to make a decision on whether or not the firm should invest in your company, a committee within the firm will meet with the startup to discuss their future goals and the possibility of growth. In order for this committee to sign off on providing the funding, the startup or company in question will be required to demonstrate that they have a highly-skilled management team, a very large potential market, and high growth potential. Venture capital firms expect to see a return on investment within 3-7 years, after which they typically make their exit and realize their ROI.

Startups Seeking Funds and a VC's Role

There are essentially five stages to a startup, which correlates to the funding that a startup receives as well as the time at which a venture capitalist firm provides their funding. While VC firms can choose to fund a startup at any stage of growth, they typically wait until the company is able to expand. The earliest round of funding is referred to as the seed stage, which is usually provided by angel investors or from acquaintances of the company's founder. Angel investors continue to provide funding as the startup focuses on product development and marketing.

The venture capital financing typically comes during the growth stage of a company. This stage of funding is divided into Series A, Series B, and Series C funding. A new round of funding occurs as the startup reaches another phase of growth. For instance, Series A funding typically covers early sales and manufacturing expenses. It's at this point in time that the startup must use their venture capital funding to create a money-making business. Series B funding is designed to provide funding to startups that are selling a product but are not yet turning a profit. If necessary, Series C and any future rounds of funding are provided to help a startup scale to account for an additional product or another market.

When the company in question has become profitable, a venture capital firm may provide some additional mezzanine financing to help the company expand substantially. This stage of funding is typically used in the months preceding an IPO, which is when a private company enters the stock exchange and offers shares of their corporation to the public. Companies are able to raise money through an IPO without the assistance of a venture capital firm. It's at this point that a VC firm will typically exit by selling their shares in the company.

🔬 Read: What are Angel Investors and Does Your Startup Need One?

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Added Benefits to Partnering with a VC Firm

Keep in mind that partnering with a VC isn't solely about the capital that they provide. In fact, many venture capital firms provide valuable mentorship and networking opportunities, which can be just as beneficial as funding to a company that's looking to grow. Since venture capitalists will own a portion of your company, they will strive to ensure that your company is profitable and provides them with a high return on investment.

Venture Capital vs. Angel Investors

Two of the most important groups of investors for startups are venture capital firms and angel investors. While angel investors mainly work alone and invest their own money, venture capitalists always work with a firm, which means that they invest the money from a variety of limited partners. The investment amount between these two groups is also decidedly different. Angel investors typically provide startups with funding in their initial stages of development, which usually means that the startup is beginning to develop or market their product.


On average, angel investors offer funding at the amount of $25,000-$125,000. On the other hand, venture capitalists invest an average of $7 million, which shows just how different the needs of a company must be when seeking funding from these two sources. Angel investors are mainly there to provide a smaller company with some much-needed financial support. While they can offer some business advice and provide the company with networking contacts, they aren't required to do so. As for venture capital firms, these firms search for companies that already have a strong product as well as a large potential market to tap into.

🔬 Related: Understanding Your Initial Small Business Funding Round

Expected Returns

Once a venture capital firm has invested into a company, they will then help to build the company into a successful one, which can involve everything from recruiting senior management to developing a strategic focus for the company. In many cases, angel investors exit the partnership much earlier than VC firms. Since an angel investor is only investing with their money, they mainly look to obtain returns of 2-3x their initial investment. On the other hand, VC firms must manage and distribute funds to their limited partners, which means that they search for much higher returns. VC firms will typically exit when a company goes public or is acquired.

When to Seek Venture Capital Financing

When you are attempting to determine if your company should seek venture capital funding opportunities, you should first perform a cost-benefit analysis of your company. The risks associated with this type of funding are relatively easy to discern, the primary of which is that you will be giving up some control over your business. However, the benefits can be substantial if you're able to accelerate the growth of your company with this funding.

You'll also need to take the time to find the right venture capital firm. As this process can take several months, you won't have as much time to grow your business organically. If you want this partnership to be as successful as possible, it's important that you find a venture capital firm that shares the same vision for your company as you do. If you've already developed a product or service that you're confident is able to reach a large market, it might be time to seek venture capital financing.

🔬 Read: Top 7 Venture Capital Firms [2020]

When You May Not Want to Seek VC Financing

On the other hand, there are times when you might require financing but feel as though venture capital funding isn't the best option for your company. In such a scenario, there are a variety of other methods through which you can seek funding. While VC funding can be highly beneficial for a company that's looking to grow and expand, you typically give up more equity when partnering with a VC firm than when you deal with angel investors or other forms of investment. For instance, you could choose to pursue self-funded endeavors by tapping into your own funds or by seeking funding from your friends, family, or some of your business operations that currently have a positive cash-flow. This money will help you fund the initial stages of your business and should keep you afloat while you develop a product and market your business. These investments also come with less expectation, which is perfect when you're not yet ready to expand your startup.

How to Find Venture Capital Funding Opportunities

Finding venture capital funding for your business can be difficult if you've never done so before. Whenever you speak with members of a VC firm, you will need to prove to them that your company has a well-built management team, has a large potential for growth, and can reach a vast potential market. If you're reaching out to one of these firms via email, don't use a standard template message. This message must be personalized and specific to the VC firm you're currently contacting. Make sure that you approach VC firms one at a time if you want this process to be relatively straightforward.

If you've already focused on building a strong professional network, consider requesting introductions to VC firms from your business associations or alumni relationships. While it's possible to contact their firm directly, this should be viewed as a last resort. Even though the pitch that you eventually make to this firm will be a lengthy one, you should be able to describe your business in a couple of sentences when you first meet with the firm (your "elevator pitch").

You might also want to think about sending a short summary pitch when following up with them after the initial contact. Before you've made your final pitch to the VC firm you're interested in, it's essential that you fully understand your business plan. Keep in mind that this process can take several months while the firm reviews your company.

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Events, Workshops, Networking and More

Southern California is a hub for startups and entrepreneurship,1 which should make it easier for your to find venture capital funding opportunities. For instance, University Lab Partners, the first wet lab incubator in Orange county located at the UCI Research Park hosts numerous events throughout the year that provide startups and entrepreneurs with the opportunity to connect with industry leaders as well as some of the top venture capital firms in the area.

For instance, the MedTech Monthly events hosted by University Lab Partners on a monthly basis covers a variety of topics in the form of workshops, discussion panels, and well respected keynote speakers within the MedTech industry. Along with these and other events held within the UC Irvine academic community, the local business community in Irvine offers extensive opportunities to meet and network with other professionals in the industry, most of which can be accessed via The Cove at UCI Applied Innovation. When you notice an upcoming networking event for the industry you work in, don't hesitate to take this opportunity -- it only takes one new contact to get you in the door with a venture capital firm!


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