The good news:
As a relatively recent addition, Google Analytics allows you to define a goal based on an event.
The bad news:
You can’t create a funnel for an event-based goal.
The good news:
You can replace your event with a virtual pageview so you can instead create a Destination URL goal, which does allow funnels.
For example, let’s say that you want to track a PDF catalog download as a goal and also create a funnel for the three pages leading up to the download.
If, as follows, you generated an event for the download, you could certainly create an event-based goal, but you would not be able to create a funnel, since the “Event” goal type does not have a funnel option:
To take advantage of the funnel option, you could generate a virtual pageview as follows and, instead of an event goal, create a “Destination URL” goal, which does allow you to define a funnel on top of the goal.
Note that events cannot be used for funnel steps themselves either; you can define a funnel based only on pageviews, whether actual or virtual.
Looking beyond goals, there are a couple of potential drawbacks to using a virtual pageview where you might have otherwise used an event. For one thing, each virtual pageview counts towards overall pageviews, which might somewhat skew some of your Google Analytics reports, and secondly, virtual pageviews would not in any way appear within the reporting for any other events you may be tracking, so it would compromise an integrated event view.
If, however, the benefit that you’ll enjoy from funnel reporting outweighs these relatively minor inconveniences, make sure to use virtual pageviews instead of events.