Venture capital investments are private capital investments in private enterprises (i.e., businesses that are not publicly traded).
It's similar to private equity (PE), but it's also distinct from it. Venture capital lends money to startups at the very beginning of their lifecycle, whereas private equity invests in more mature startups. The emphasis on early-stage startups (higher risk) is what gives the term "venture capital" its name. However, it is not wrong to say that VC is fundamentally a subset of PE.
A VC firm's limited partners may include wealthy families, retirement funds, insurance companies, and other financial institutions with large sums of money. They give the funds to the venture capital firm which then invests the money in a startup. However, LPs (limited partners) do not run the VC business (thus, the use of the word "limited"). They are willing to invest in a venture capital firm because the expected returns are higher than their other options (public equity markets, debt, real estate, etc.). Having said that, they also recognize that it is a high-risk investment and, as a result, commit only a small portion of their funds to it (usually 5-10 percent).
General partners (GPs) are typically experienced financial advisers with a proven track record of fund management. They must juggle numerous responsibilities:
Many venture capitalists claim that their investments add value to the startups that they fund. But how do they manage to do so? And, more importantly, is it truly resulting in higher returns for their investors? Several venture capital firms are emphasizing the need for more employees with operational experience. Based on a variety of sources, it is widely assumed that most funds with well-developed portfolio operator systems have top-quartile yields (generally above 20 percent IRR in the relevant timespans).
There are five key tools that venture capitalists can use to increase the value of their portfolio companies. They are as follows:
A competent operational toolkit is expensive.
This is where venture capitalists come in. After all, money is frequently the primary reason why founders begin their fundraising journey in the first place. In line with this, venture capitalists (VCs) actively fund entrepreneurial ventures, assisting cash-strapped early-stage startups with product development, growth, and expansion at an unprecedented rate.
When they begin their journey, startups, by definition, do not have a competitive brand value.
As a result, the fact that a startup has been sponsored by a well-known fund/partner may increase its chances of success. A boost in the startup's brand makes it easier to attract exceptional team members and follow-on investors.
Some of America's most prominent VCs' default response to any challenge is to email founders to 3-10 people in their networks who can help.
Later-stage venture capitalists pay close attention to a startup's previous investors, using the investors' image and reputation as a proxy for their own due diligence. As a result, the ability to easily raise more cash in the second and/or third rounds from a VC's former syndicate partners is the next best asset to having a substantial war chest. This is why the funding network that VCs provide access to can be critical to the startup's future.
VCs can provide access to consulting, outsourcing, bookkeeping, and operational resources to founders, either directly or through selected service vendors.
VC firms make their money by betting on your future success.
Rather than giving you a loan that you must repay later, venture capitalists exchange their money for a stake in your startup in the hopes of profiting from its future success. This means that when you try to scale, you won't be burdened by crushing debt and the drag of monthly payments. You have a lot of say over the money that VCs put into you.
VCs are keenly interested in the success of your startup because they want to recoup their investment. This means they'll do whatever they can (within reasonable limits) to help your startup grow and develop using tried-and-true methods.
As a result, expert advice, mentorship, and training are frequently included in investment deals.
VC investors would not be where they are if they were not well-connected, which is part of the allure of bringing them on board.
They not only know different investors, but they also frequently meet a lot of other companies and people who have the talents and resources that you'll most likely require. They can point you in the right direction if you're looking for partners, cofounders, staff, consultants, or more money.
If you're ready to grow but find the process too long, slow, or arduous, venture capital investment could be the solution. Because of the financial resources provided by VCs, startups can develop and expand much more quickly than they could otherwise; such speed and momentum are critical in today's fast-paced market.
As a result, startups with growth-enabling VC have a distinct competitive advantage.
Here’s the deal.
Investors are not interested in meeting with you. They want to introduce you to them. There is a significant difference between the two approaches, which is only logical. The job of a venture capitalist is to find the needle in the haystack. As a result, investors rely on their network to perform the initial screening.
This nugget of information should undoubtedly be incorporated into your approach to raising funds. Instead of attempting to build an investor network, you should first concentrate on developing an introducer network. And not all introducers are the same.
Here are four ideas to get you started:
If you work in a startup hotspot, you almost certainly have friends (or at least acquaintances) who are developing their own startups. Solicit their assistance. "Am I ready to fundraise?" should be your first concern. This question will help you determine how warm the introductions made for you by your friends will be. They won't be able to hide their feelings from their own investors if they like you but don't completely trust your startup yet. However, once you've received their approval, you should definitely reach out to them for possible introductions.
Getting a meeting with another founder is far easier than getting a meeting with a well-known VC. When requesting an introduction from another founder, you must make a compelling case for your startup, because a founder will only make an introduction to their investors if they believe there is a good chance that the introduction will result in an investment. (When it doesn't, it has an impact on the entrepreneur's own reputation.)
As soon as their investment arrives, you must begin converting your early investors into champions. They'll almost certainly become your most dependable source of warm introductions. You must, however, assist them in being helpful because they have no idea who you've already spoken to or how you require assistance. Empathize with them and communicate effectively with them.
A well-organized investment pipeline is very beneficial.
It's the place where founders keep track of every investor they've approached. This record should include not only your position with each VC, but also the contacts you share with them. Make an effort to balance things out so that the people with the best introductions are distributed fairly evenly. Getting three introductions is great, but getting five is pushing it, unless the introducer is a good friend or an investor themselves.
Just because someone has asked you to connect them with a venture capitalist isn't a good enough reason to do so. Consider whether the two people are a good fit. If someone you know has a "concept" and asks you for a connection to a specific VC, and you know the VC doesn't invest in "concepts," tell them you'd be happy to make the introduction later, once they've progressed past the "concept" stage. Remember to explain why the introduction is possibly premature. You should also feel free to ask why the person requesting an introduction wants one and whether they believe they are ready to be connected.
If you want to introduce your own employees or business partners to a VC, the latter must have faith in your team's ability to build your company. You may not have enough time to go into great detail about why all ten (or more) members of your team are uniquely qualified to help your company thrive (if you have a team that large). Choose five people to focus on and discuss; these five people could be cofounders, employees, or advisors.
Identify one outstanding accomplishment that the individual has attained that distinguishes them as a valuable team member of your startup. Carry out this procedure for each of the five people. Include the rest of the founding team on the slide to show how big the team is, but don't spend too much time talking about them.
Founders with little or no operational expertise and insufficient funds may turn to venture capital (VC) for funding and advice from experienced industry professionals. Founders are frequently unable to obtain bank financing due to their general lack of business expertise and the high-risk nature of new startups, which is where VCs come in. VCs provide funding to founders in exchange for a portion of decision-making authority and an equity stake in the startup.
Source: by Adarsh Raj Bhatt in www.abstractops.com