How Startups Obtain Venture Capital Funding

Get VC Funding With the Right VC Financial Model

While there’s no shortage of relevant information on the internet, creating a self-researched venture capital funding strategy for your startup can be daunting.

Based on many conversations with earlier-stage companies, and knowing that getting VC funding is always top-of-mind for these ambitious startups, I modeled a new, high-level fundraising strategy. I designed the strategy as if I were just getting my business started. No two companies are identical, of course, but these general concepts can apply in some way to founders without much fundraising experience.

How To Plan Your VC Funding Model

When I say ‘plan,’ I mean more than big-picture goals. Do you have a detailed financial plan? Be sure to nail down the basics, beginning with a three-year financial pro forma.

A dynamic, three-statement financial model is most useful when creating a pro forma. This model calculates changes to your cash balance as you tweak your fundraising strategy and revenue projections.

Which Assumptions Drive Your Venture Capital Funding Model?

Do you know the most important KPIs, or key performance indicators, that drive your business? These values measure how successfully your company is meeting its objectives, often in relation to competitors within that sector.

Trace every dollar of projected revenue backward. Find the actions or assumptions that drive them. Once you have this list,  incorporate them (in their own section) into your financial model so they can be changed rapidly.

Examples of KPIs might include, but are definitely not limited to:

• Average annual contract value
• Number of deals closed per quarter per sales representative
• Number of sales representatives in a given month
• Customer acquisition cost
• Churn rate

Remember, the viability of your business depends on your KPIs.

How To Fundraise: Identify Key Milestones

Try fundraising based upon anticipated milestones, i.e., those expected to trigger valuation inflection points.

Using your pro forma, map out the various points in time at which you plan to achieve a key milestone. Map it as precisely as possible, ideally down to each quarter or month.

The milestone might be:

• A product launch
• A certain revenue run rate
• Expansion from one to three markets
• Version 2.0
• 100k users
• Something entirely different

Raising Venture Capital Funds

Next, calculate the net cash burn (i.e., the rate at which a company spends cash in a given period) required to reach your identified milestones.

Equipped with this information, create a realistic fundraising plan that enables you to operate for 12-18 months between fundraising rounds. Be sure to build in a buffer!

Inevitably, it takes longer to raise venture capital than you think.

Lead venture capital firms could take 6-12 weeks to reach a term sheet. Then, potentially, you need another month to close the venture capital investment and wire funds. Include some padding so you don’t set yourself up to be in a position of cash weakness while you raise VC funding.

As an example, say the current date is 01/01/2026, and you identified two milestone estimates:

1. Initial product launch on 06/01/2026
2. $100k trailing 12-month (TTM) revenue on 06/01/2026

Assume also that you calculated the estimated total cash burn to reach:

• Milestone 1 (+ 2 months) to equal $250k
• Milestone 2 (+ 2 months) to equal $750k

Plus, your current cash balance is largely depleted.

One possible near-term fundraising plan could be to raise $250k. This funds through Milestone 1.

Then, raise the next $750k (shortly after achieving Milestone 1) to fund the business through Milestone 2.

Valuation and Venture Capital Fundraising: Know When the Price Is Right

Understand the framework for how the market may value you at these inflection points or future ‘milestone’ dates. Your goal is to raise the money you need at each identified milestone while minimizing your dilution exposure with respect to your stage of business.

Expect an appropriate amount of dilution at each raise; not too much, but also not too little.

For example, you run a B2B SaaS (software as a service) business. Your research suggests that the market typically uses revenue multiples between 4 to 10x TTM revenue to value your business (hypothetically). TTM revenue means over the ‘trailing twelve months.’

Based on your research, you should anticipate the future and think twice before aggressively negotiating for a valuation in your 2023 round. That valuation could match or exceed the valuations the market will likely bear for your business in your 2024 round.

Your theoretical range is 4 x (TTM Revenue) to 10 x (TTM Revenue).

Pushing for new valuation in a 2026 round could strain your future fundraising efforts unnecessarily. This may position the business for a ‘down round,’ in which shares are sold for less than in previous rounds.

How To Find Venture Capital Investors

Build your investor wish list. Begin with who you think might be the most valuable partners to your business at each funding stage.

Look at associations, such as the National Venture Capital Association (NVCA), or research venture capital firms with an eye on sector, geography, and other relevant factors, like management strategy or typical level of VC funding.

Once you have your list, understand that venture capital investors are not all alike in:

• Check size
• Industry
• Stage of business
• Market traction
• Preferred geography
• Culture
• Role (e.g., lead vs. passive)

Determine which investors to target for each of your planned fundraising rounds and get to know them early.

Be Open, Honest, and Responsive to Investor Inquiries

VC investors don’t like the notion that someone is not forthright with them.

Be open, genuine, and concise. Identify your challenges and weaknesses upfront. Share your strategy for resolving those challenges. It will build trust and help illuminate issues earlier as you seek VC funding.

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Raising Capital: Negotiating with Potential Investors
2. Turning an Idea or Product Into a Business
3. What Every Founder/Entrepreneur Must Know 

This is an updated version of an article originally published on May 26, 2017, and revised on March 23, 2020 and October 10, 2023. This article was most recently updated by the Financial Poise Editors.]

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