You may assume that fundraising from venture capital firms is a dramatic pitch moment. In reality, the most important moments are decisions about and representations of basic issues such as ownership, governance, execution discipline and unit economics. They’re determined by a disciplined evaluation process shaped by how investors think about startups as an asset class as they apply a consistent investment strategy. This includes internal memos, investment committees and diligence reviews that test whether a company’s story can hold up under scrutiny.
Understanding the process, and how to prepare for it, is critical.
This is how fundraising actually works.
Pre-Fundraise Prep
Before fundraising, there are some important items to line up, particularly for founders raising pre-seed or seed funding with only an early business plan and limited operating history. First, establish clear ownership and control of the company. Investors first want to see a clean cap table and clear decision makers. More importantly, before you embark on selling equity, you should ensure that your core equity holders and/or founders are clear about how much equity they each hold and how you will make decisions on taking investors. The long-term success of your company often depends on this clarity.
Similarly, founders should be clear on who owns the intellectual property, under which legal jurisdiction and any filings that are pending. Before raising capital, founders should discuss and align on whether they are open to equity, debt or hybrid structures.
Finally, founders should prepare their fundraising narrative. This includes a minimum viable product, if it’s ready, a clear explanation of why the product can’t be easily replicated and any “unfair advantages” that the founders have that would show why they are well positioned vis-à-vis other similar startups.
The Initial Screening Call
After securing initial calls with VC firms, it’s important to understand their purpose: They’re designed to determine whether a startup is worth further evaluation. It’s not to make an investment decision.
Venture capitalists examine the people first, including founder credibility, judgment and alignment, before they dive deep into the product. Investors are looking for “formidable founders.” The ability to explain the business simply is more important than technical explanations. Some will test founders, probing the assumptions and analysis. For example, they may ask: “How confident are you in these assumptions?”
Next, investors want founders to clearly explain the business model. Who are the customers, what are they paying for and why? An unclear path to monetization is a red flag, regardless of the vision or market size. In addition, detailing when payment occurs during the customer journey is critical. Many investors prefer revenue that is accessed at the time of booking rather than later in the customer lifecycle. While models don’t have to be perfect, consistency is expected. Revenue per transaction, scalability and margin logic should hold together. These signals help determine whether a company fits a venture firm’s broader investment strategy and merits deeper engagement as a potential investment. Founders often oversell in these initial meetings, which can present problems later on.
Once they understand the business model, investors want to see a compelling total market size. While headline TAM is exciting, the real focus is realistic market penetration. Often, investors prefer conservative projects, or numbers that may even feel boring but believable. Market share numbers, for example, should be defensible. Conservative math may not seem exciting, but it builds trust faster than hand-waving that’s not believable.
Go-To-Market Proof and Traction
For early-stage startups, traction is often the clearest signal that turns investor interest into real funding opportunities. Once financial assumptions are stress-tested, the focus shifts from forecasts to evidence. Early-stage investors look for early traction as a proxy for long-term viability when the company doesn’t have a long track record. Even if the timeframe is limited, if the early demand signals are clear and measurable, they carry weight.
It’s not only the headline numbers, but also how the results were achieved. For example, capital efficiency — low cost with high output — suggests discipline and repeatability and reduces the potential execution risk. Investors also want to know exactly which actions produced which outcomes. Vague claims are less valuable than noting precisely where traffic came from and what triggered it. Clear attribution provides confidence that growth can be reproduced.
Another question on future growth is whether early traction can extend across regions and platforms. Even if a product clearly works in one market and channel, how cleanly can it extend to others? Investors don’t fund traction because it’s impressive. They fund it because it’s explainable, cost-efficient and repeatable.
Decision-Making
Once founders make their pitch, the real decision-making begins internally with the investment firm. Inside venture capital firms, the formal investment decision rarely rests with a single person. Typically, an investor or deal lead prepares a concise document that analyzes the strengths, risks, open questions and next steps. Most firms have a collective approval process where a certain number of investors or investment committee must support a deal.
These investment decisions can take time, so periods of quiet are common. The numbers and structure of the pitch have to hold up with the investment committee when founders aren’t in the room. If the investor decides to move forward, the exploration turns into concrete intent.
Term Sheet Phase
With this decision, the investor will issue a term sheet. Whether the round is seed funding or a later venture capital raise, the discussion moves from narrative to the structure and specifics of the deal. The equity and debt economics, company control and governance are specified line by line in writing. The term sheet clarifies governance in the form of company oversight, restrictions and reporting requirements.
While this dives deep into contracts and legal issues, it often raises critical strategic questions for founders. For example: Do you want to take on more capital, knowing you’ll then have to have a larger exit down the line for the larger round to be worth it? How does the current economic environment affect whether you think you’ll be able to raise in the next 18 months and whether you should therefore raise more? Are you personally ready to commit long term for this startup? Do you want to take on some debt to reduce the equity you personally sell despite the obligations that can add? How much control do you want to give up to investors?
Once a term sheet is signed, it is not yet final. It’s still subject to due diligence and final agreements.
Formal Due Diligence
In diligence, investors want to verify and confirm what has already been discussed. Surprises are much more damaging than weaknesses disclosed early. All startups face challenges, but if there is a perception that something important was hidden or not disclosed, a deal can fall through.
Much of the focus turns to legal, financial, technical or other documents, rather than conversations. This can include corporate structure and ownership, IP filings and jurisdiction, financial models and assumptions, compliance, KYC and regulatory exposure. It’s important that companies have this executed well and in a timely fashion.
Closing and Getting Started
Once diligence is complete, you’re almost there. You can move to final agreements and last legal, compliance and administrative steps. Capital drawdown is typically not instant but happens within about 30 days.
At this phase, the investor’s role shifts from assessment to oversight. For most investors, they are not involved daily, but stay involved through reporting, compliance and other check-ins. Now the tough part really begins with company building and execution.
Once funding is closed, the real execution begins, and communication with investors is critical. Just as with fundraising, transparency and reliability matter more than overly positive narratives. This lays the groundwork for future rounds by demonstrating momentum, investor alignment and repeatable growth.
Conclusion
Funding isn’t raised from a pitch. For venture capitalists evaluating early-stage startups, the real investment decision is shaped long before a pitch and long after it ends through investors’ internal scrutiny. Ownership clarity, governance structure and simple unit economics matter more than most founders expect. Realistic assumptions and clearly explainable models develop trust faster than pie-in-the-sky projections. Traction only matters when it’s attributable, cost-efficient and repeatable. Once you close funding, the real work begins with execution and transparency with investors. Fundraising isn’t a single moment. It’s a long process of validation that continues even after the capital arrives.
