Should You Pursue Venture Capital? Startup Funding Advice from Diego Rubio of CORI

In this episode, we’re sharing a powerful excerpt from one of our most popular mentor-led workshops—an intro to venture capital with Diego Rubio from the Center on Rural Innovation (CORI). Diego unpacks how venture capital really works, what VCs are looking for, and whether this funding path makes sense for your startup.

You’ll learn:

• The structure behind VC funds and why they chase big wins
• How equity dilution works across funding stages
• What signals investors look for in early-stage startups
• When founders should not pursue VC funding
• What it takes to be “VC-ready”

🎧 To access the full one-hour workshop (plus book a free call with Diego), create a free account at sprocketwky.com/join.

This episode is sponsored by Kentucky Fried Creative—authentic marketing for the Common Wealth, from right here in the Commonwealth.

Thank you for tuning in to this episode of the Sprocket Podcast! If you’re ready to dive into the world of startups and innovation, visit us online at Sprocket WKY to learn more about our mission and how we support entrepreneurs like you.

Ready to check out the space? Book a tour with Tiffany, our Community Coordinator!

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Let’s turn your ideas into reality—together!

Sprocket is proud to be supported by Team Kentucky, the Commonwealth's Cabinet for Economic Development. Learn more about their initiatives and resources at ced.ky.gov.

Transcript

0:47

Maybe you are looking to get venture capital funding, maybe you are barely exploring it and wanna learn more. But, my name is Diego. I work for the Center on Rural Innovation, and my title here is is consultant in entrepreneurship and economic Development. So we go across the country and we help communities and innovation hubs like sprocket pursue funding, gain research, and create programs, whether it's through entrepreneurship or through tech talent development. And, my background is all, all around entrepreneurship. I've been an entrepreneur for many years. I've had my own companies and have worked, I've lectured and taught entrepreneurship courses in university, and now I'm, I get to do this amazing work that I'm able to, expand nationally and be able to give to rural communities, which I'm I'm from a rural community. So it's, it feels good to be, to give back. But anyways, today's talk is more about de demystifying venture capital and having a 1 0 1 on what it, what is venture capital, how does it work evaluating whether VC is good for your company. And we'll open up for q and a to answer any specific questions that you might have for venture capital. First and foremost, VC is like the show's Shark Tank. There's fewer cameras, but in more spreadsheets it's probably more boring to attend a VC meeting. But at least you don't have anyone yelling out, I'm out right in the middle of the pitch. VC is a form of private equity, which means investors give money to early stage or high growth startups in exchange for equity, in exchange for ownership from the company. So it's not a loan. And the VCs only win if the startup succeeds, either by getting acquired, by going public, or, reaches a huge valuation where they can start selling pieces of it to, to other VCs. VC manage manages other people's funding money, and that means that they're accountable to. Few investors or large investors, these investors are sometimes pension funds. They're endowments, they're wealthy families, so these folks expect serious returns. The people making these decisions are called general partners, and their job essentially is to spot that game changer company that will make them pursue other startups and be okay with failing because they can recruit their losses by getting that unicorn startup in the future. That's why you hear VCs whenever you go into a meeting with a vc they'll always ask you, what is your tam? What is your total addressable market? Can you 10 x this in five years? Do you have a moat or do you have a competitive edge that will help us differentiate yourself from a market? And it's not because they're trying to be harsh or anything like that, it's because they need their winners to make up for their losers. So if your startup can't scale fast and big VC might not be the right fit for you. So here's the basic structure. A VC fund raises capital from investors like endowments and wealthy families. And those managers of those endowments are called limited partners. And then the general partners are the ones that pick the startups and hopefully those startups grow. And then in five to 10 years, the VC sells their stake or go, goes public with the company for a profit. And also the VC takes 2% of the fund per year as a fee and keeps 20% of the carry, which is the profit of whatever they take. They can make a whole lot of money with a really good exit. And I'll give you an example of a scenario. So let's say a VC raises. A$20 million fund, and they'll usually get paid 2% per year to manage it. That's$400,000 a year just to cover salaries to cover their rent, and to be able to fly around the country and talk about how excited they are to invest in these comp in these startups. Then if they invest that fund a few years later, those investments maybe turn into 60 million. And in those returns, the VC gets 20% of that profit. So the fund returns are 60 million minus the original fund of 20 million. That's a$40 million profit. The carry for that is$8 million in profit for the vc. So the VC walks away with their annual fees and the$8 million bonus if the fund performs well. So you now you understand why they're always pursuing those big winners because the payouts are huge. And it's important to know that whenever. You start your company, and you're probably right now in the foundation stage where you're owning 100% of your company. Maybe you've gotten some funding from friends or from family and you're already in the seed stage and you're already given up equity once you get into the angel stage and the vc stage, which is the Series A, series B, and there's even all the way up to series F sometimes you can expect to have a dilution like this. This is a standard average of dilution that you would see per stage. So if that's something that you're not comfortable with, I would highly recommend for you to reconsider some other forms of investment because it is expected for you to have less ownership over time as you pursue more funding, as you pur, pursue more rounds as well. And take a look at this chart because this chart will help you understand the perspective of where you might be in a couple of years or where you're at right now. So the first stage is the seed capital, right? You start, first start as co-founders. You have no money. You're bootstrapping, you're trying to pay with your paycheck from your day job. And then you get an angel that comes in and gives you some money, but you're not making any money. You're in most cases, you're losing money. That's called the valley of death, right? But you start to prove your market fit. You're starting to prove that there's product market fit and a VC gets interested, or you get a meeting with a vc, then you start seeing some turnaround in your revenue. And the VC gets interested in investing in your company. So that's called the early stage of acquisition for VCs. It's the first or second funding round. And the third and the mezzanine is whenever, the company is getting pretty big where they can either get acquired or go public and they have enough of market share to, to do that. Remember this chart and don't get discouraged of Hey, I'm not making any revenue. I'm actually losing money. That's totally normal and it's expected to lose money as you're trying to find that product market fit. Now the big question to ask yourselves as founders is my startup even fit for vc? A VC doesn't make sense when the capital need is small or gradual. So maybe you need just a couple of dollars to rent out a booth in a trade show. Maybe you need, to buy a camera, to do your marketing. You don't need VC funding for that. You don't need vc. It doesn't make sense. Whenever the business can grow with revenue, you're already producing revenue. You already have enough revenue to, to cover any expenses and or getting a loan, right? You might get a loan to buy manufacturing equipment. That would make sense in your stage rather than pursuing a VC fund and diluting your equity. And, it doesn't make sense whenever the founder yourself doesn't want to give up control. Once you sell a portion of your company, the VC firm is going to become. Your lead advisor. So it's also important to look for those venture capital firms that are aligned with your ideals that are not jerks, that are, you can get along with them because you're gonna be working with them. They're gonna ask you for board chair, they're gonna be, right there with you rolling up their sleeves and trying to solve the problem with you. Because they want the return on their investment. So they're gonna make everything and anything possible to make your company look good. And once you're reaching out to these companies, and if you get a meeting with them and you feel like something is off and they might be a potential jerk, it's okay to say no. It's okay to look for other VC firms and other investment funds to, to pursue funding. You gotta feel aligned with what they believe the vision is for your company. Because at the end of the day they'll have some control over you. VC will make sense if your startup is high growth or it has like a tech component that could be scalable really fast and you're comfortable with giving equity and your market potential is huge, right? You're proving that the total addressable market is in the millions, and it could be something that could be adapted worldwide, and you've proven it through customer discovery and through tests and you've been showing that the expansion of customers have has been progressing over and over. Whenever you're considering vc, just think about am I okay with giving up equity? Is my solution able to scale quickly and, big and if the answer is no you should take a pause and figure out different ways of funding your your startup. Or think of ways where you're the angle, the product market fit, or the offering that you're trying to pursue can turn into something scalable. Maybe you're doing something that's not scalable, but what could be scalable about it? Maybe you're. You have courses online, but don't have a platform. Maybe the platform could be the scalable part. So adapt to what the VCs are looking for if you want to take the VC route. Awesome. So now again, if you're already interested in raising capital through vc, how do you know if you're really ready? Because a lot of startups may think that they need a VC when they actually don't, and the people who might actually need it might not be ready yet. So your role as a founder is to understand where you are and what a VC ready startup typically has is. Number one, they have a founding team with Backable talent. So investors are always going to bet on people rather than the idea itself. You're gonna hear this a lot whenever you meet the VCs. They're gonna say, we're looking for a great team. We're an investor of people. And that's pretty, pretty much true because they also are in the philosophy of, yeah, we don't work with jerks. We don't we like to work with someone that's coachable. We're looking for someone who is having the right experience and are having grit and coachability and the technical and business expertise to have a conversation with us and spar ideas with to see what the direction is for their company. The second thing that they're looking for is the product or the service is solving a big, painful problem. So investors. Again, want to see product market fit, or at least some strong indications that you're pursuing that. So any single signals of readiness include, you have an early user at adoption, you have a wait list for your product, you have an MVP with engagement, or you even have testimonials or case studies that show positive feedback on your product. So if a founder, for example, has I don't know, 200 beta testers waiting for the next update of their app, that's a way more compelling speech than a pitch deck alone, right? So it. Look for traction. Look for those early adoptions and those indications of product market fit. And don't focus on, having the perfect slide deck because you can always work on that later on. And third is having a massive and growing market, right? If you've done your research, maybe you're in the pet industry and you know that the pet industry has. Exploded over the last 10 years. VCs are gonna be extremely interested in that. Or, the other obvious one is ai. AI right now is super hot. Everybody's wanting to work on ai, so VCs typically won't invest into niche ideas unless they're really attached to larger vision. So take Airbnb for example, they were very niche. It was a temporary housing for people looking for housing during conferences. And then they expanded into vacation rentals. And so anybody can be, a vacation rental owner, anybody can rent an apartment in anywhere in the world. So they were first a niche idea, the larger vision kind of exploded once they met VCs. And they, they understood that their addressable market needed to be bigger. So you need to show your total addressable market, your serviceable addressable market, and the obtainable market as well. Whenever you meet these VCs you also need to focus on whether your product is focused on a trend like ai, like climate tech, aging populations what have you. And really understanding your trend or your angle is also gonna help you identify which VC firms are applicable for you. Because there are some investment funds out there that only invest in clean tech companies that only invest in SaaS companies, right? Understand what your product category is so that you can look for investment funds that focus on supporting and funding those types of companies. And. Last but not least the things that fe, that VCs are looking for in a startup is, you have a path to a scalable growth. You're ha you're having reco recurring revenue. You either have subscriptions, you have a SaaS, you have partnerships or distribution channels that kind of solidify that your go-to market strategy is feasible. Or even have, scalable tech that, that, or service hav heavy models that can be, expanded on with very little capital. And, having. Basic financial legal hygiene. So understanding, what a cap table is and having a clean cap table. So a cap table is, not having 15 friends with equity in your company. You have a solid understanding of dilution, you have a financial model with reasonable assumptions, and you have a legal formation. People prefer to have a C corp in Delaware, for example. So whenever you talk to a vc, they're gonna ask you where is your C corp from? So they're gonna preferably want it from Delaware. Delaware but you can do it from any states. And last but not least, these are some resources to. Dig deeper into what VC is. I always recommend this book by Brad Feld. It's called Venture Deals and it's essentially ev everyone you talk to who is in entrepreneurship or entrepreneurship education, they're gonna recommend this book whenever you're wanting to learn about vc. There's also a guide to seed fundraising at Wine Combinator and Harvest Business School. Put out a info session on how VC works. So there's plenty of resources out there that can answer a lot more questions, and I'm also happy to, chat one-on-one after today's call and answer any questions whether you have a particular situation or you want to talk to one of our investments. Associates at our investment fund, and you just wanna run by with them, some numbers, some assumptions, or maybe you have some questions about your pitch deck you're wanting to prep for a VC meeting. I'm happy to hop on a call and help you out in any way that I can.