A journey of a thousand miles starts with a single step. It is never about when you get there; it is about how you get there. The journey of any startup has always been an exciting yet inspiring story. The challenges like venture capital funding and the small wins are but a tip of the iceberg before reaching any destination. Despite that, the beginning of the journey has always been the most important. This is because it’s where you build on the foundation of your business.
Profit is every entrepreneur’s ultimate goal at the end of the day. And as said earlier, the beginning is always the hardest. They say giving birth is not hard work; the real work is nurturing the kid. Similarly, starting a business is not as hard, but growing the business to the levels needed is real work. Every startup needs venture funding to provide the required resources to the new business. They can be in terms of money or consultations.
There are many ways to acquire funding for companies. They include Venture Capital financing, Angel Investments, Private Equities, Index Ventures, and Benchmark Capital. It’s a good idea for startup companies to know Venture Capital funding works. This will give them a benchmark on their turnaround time to break even and start making good gains. This is because most of the Venture Capital firms only stay for about 10yrs before exiting. Before starting our discussion on the venture capital funding guide, we need to know what exactly is venture capital meaning. Let’s read below to know about it.
Venture Funding Definition
Professor Georges Doriot started venture Capital. He was a professor at Harvard Business School at the time. He aimed to invest in the technologies which were being developed and used in WWII. He was named the “father of venture capital.”.
Venture capital Funding is resources provided by an investor/s to upcoming companies for the first time. These startups are considered to have long time growth and have high potentials for returns. Venture capital can be a private firm, investment bank, or other institutions that may have an interest in your company.
If you are an entrepreneur and you don’t have the funds, these are some of the questions you should ask yourself before choosing this path.
- Are you willing to hand over ownership and decision-making?
- Do you have the right experience for the job, or do you require additional help in terms of resources and expertise?
- Are you in need of Venture Capital connections?
Features of a Venture Company
The financing institution acquires most shares and hence makes most of the significant decisions.
- Capital Ventures majorly finance upcoming startups.
- It can be given to entrepreneurs or companies.
- It consists of private entities or individuals who are well off.
It does not have long term financial goals with the startup. That means that it’s only available until such a time the company has grown and can be sold.
They spread their risks in many companies; hence if the company fails, the rest is not affected. They are very picky about which companies and industries invest in.
How Does Venture Funding Work?
To begin with, you need a business plan. It is taken to a Venture Capital firm, where they review your plan and follow up with due diligence. Moreover, you are not limited to how many venture Capitalists you approach. You will comply with all the US regulations in this regard. However, do approach the Venture capitalists that match your company’s goals. Additionally, it is prudent that, before submitting, to ensure that your house is in order. This is because Venture Capital Firms will go through the company’s history, management, products and services, financial history, and everything they require before funding.
When the investor or Capital Venture Firm is done, they will offer a term sheet. At this juncture, your investor will have met with you face to face to familiarize yourself with you. It is advisable to connect with them on a personal level so that you get to know them better. The term sheet is a non-binding assurance that you will be getting the funds. The investor will have his terms of investment in the term sheet. When due diligence is over, and the investor is ready, all the necessary documents are signed, and the funds are sent.
There are two key factors of a venture capital fund. And they are the general and the limited partners.
The limited partners are mainly in charge of the day to day decision making of the company. They find and formulate agreements with startup companies. The limited partners do the actual funding of the business. Frankly speaking, the limited partners provide the funds while the general partners make the investments.
Venture capital financing doesn’t use the funds of their partners. Instead, they use the funds of limited companies, pension funds, hedge funds, and the like. As a startup, you need to raise money to enable you to convince them to give you the resources. And for that, you shall provide them with equity.
Now there are different types of Venture Capital. Let’s look at them one by one in the following section.
What are the Types of Venture Capital
This is the initial idea of the startup company. Not many Venture Capitalists will invest at this stage. But if they do, it is probably to check the market feasibility, product sampling, and making prototypes and administration costs. When and if the market is feasible, the Venture Capitalist invests funds for the initial development of the business. That is, developing business plans, administrative and management structures, and other developments.
Also, not much funding is expected here. This is the stage where the prototypes are introduced to the market. Venture Financing at this stage is mainly for advertising, additional market research, or finalizing the final prototypes.
This is whereby the company is ready to break ground for sales and large scale productions. Most Venture Capitalists will enter at this stage. The company will need large financing to improve output, efficiency, and to break even.
The business is ready to expand its reach through marketing or even start another business. Venture Capital financing will help you move ahead to growing the business further and create new markets.
Later stage/ bridge stage
The company has reached greater heights and has gained recognition. The Venture Capitalist is now ready to liquidate their share and exit the company. This offers the company a chance to go public or attract other investors through IPOs and Mergers. The Venture Capital will help you in finalizing and paying for the cost of going public.
The earlier a Venture Capitalist enters the company, the higher the gains as he/she will earn more.
What are the Top Venture Capital Firms?
They are both the investor and the fund managers. Their responsibility is to identify new opportunities; the business models and strategies generate more revenue. Venture capital firms have to find partners to invest in them with the promise of long term gains—usually five times or ten times higher with interest.
Their work is to make wise investments to ensure they repay their limited partners. You can find an updated list of venture companies here.
Best Kept Secrets
Not every venture firm can be trusted. Here are some few kept secrets by venture capitalists.
- Many VCs don’t match up to their promises and end up losing most of their Capital. This is because, after the startups’ boom, they are snatched by other entities of private equities.
- Not all advice from Venture Capitalists is good. This ends up creating a bad reputation and a bad portfolio for them.
- Not every VC will have your interests at heart. They have divisive ways to ensure control of your business, which later brings conflicts.
- They are cunning and will manage to get ahead of you always. You will find that after they approach any startup, they also meet other competing startups from which they will choose.
- They are money-oriented. They get to be paid large sums as salaries even before they start getting returns.
- Despite that VCs use the Capital acquired by limited partners, they draft contracts that will give them first access to profits leaving out the limited partners. This is why you find many limited partners are left high and dry.
Where to get Venture Funding.
Venture Capitals have become more prominent like never before. This is due to the growing demand for startups who need Capital to grow. There are more than a few sites you can get companies providing Venture capital. They include Walker Sands, Crunchbase, and MyCapital are good examples. Even though it’s still hard to get funding, here are the steps you need to take to get Venture Capital Funding.
Deciding your ultimate goals. Not every decision you make will take you to greater heights. You might be successful, but your brand won’t be well known. That is why you would require VCs to help you.
- It’s always wise you patent your intellectual property, especially if it is a new technology or idea. This is because it might be used by someone else.
- Consider raising your funds locally, like from friends and family. This will ease too much hassle while starting up.
- Knowing how venture capitalists make their money. They will aim to ensure that their investors get paid as well as their managers.
- Be at the right stage. This is because VCs weigh both potential and risk. If you’re too early, you may prosper, but you may also fail. Being in the right spot will give VCs confidence in choosing you.
- It’s time now to prepare your documents. They include your pitch, executive summary, and your business plan.
- Selecting your target. Since VCs are always looking for a different niche. Knowing where you stand will help you choose VCs who have aligned interests with you. This will also help you set your budgets and whether you need a VC or not.
- Finally, get legal assistance who will help you in finalizing the deal. They will also provide insights on due diligence as well as term sheets.
Below are some companies in the United States that have provided and are providing venture capital to young entrepreneurs.
It was founded in the year 2015. It aims to fund startup companies, which, if successful, will leave a mark in achieving sustainable development goals.
Founded by Steve Case in 2005, Revolution has partnered with entrepreneurs at each stage of development. It aims at bridging the gaps of opportunity as well as talents in the endeavors. Over the years, it has made over 215 ventures, and 25 exist.
It aims to empower the global ambitions of inspired entrepreneurs. Additionally, it hopes to build world-class companies that will change how people live with technology.
How Venture Companies Make Money
Management fees venture capitals pay an annual fee for having their fees managed professionally. The fees are used to pay for expenses and salaries. They are calculated on a percentage of the actual commitment fund, which is 2-2.5%.
Carried interest is the amount paid to the fund managers when an investment is successful. Carried interest in Venture Capital is usually around 20-25% of all the profits made. This means that the rest of the profits are sent to the limited partners.
Key Takeaways in Venture Capitals
Be your own brand- by this, I mean market yourself and your company in the right places. Have a portfolio that will be a useful marketing tool for you. Join groups that will help you create and generate new ideas to incorporate into your company. As they say, if you want to be a millionaire, associate yourself with millionaires.
Believe in yourself and your team. Most at times, it is called the “gut-feeling.” Can you invest your money in the business? If it’s a resounding yes, then that’s how you know you are on the right track.
- A thesis is a document that is given out to be proven. The best way to demonstrate your commitment is to have this document near. It will aid in the evaluation and re-evaluation of your deals hence refining them.
- Be a go-getter. Always work hard, stay hungry, and, most of all, stay humble. This will build your reputation as well as you as the brand within your geographical circles. It will also help you get introduced to the right people.
- Be a person with integrity. This means that you will be accountable for everything. Additionally, be transparent with all stakeholders to build lasting relationships.
As the name suggests, it’s very private. This means that shares cannot be traded publicly. This can be private companies or individuals with high net worth. What differentiates them from Venture Capital is that they funded already established companies. Their sole purpose is reviving revenues of companies that may be falling. They take complete ownership of the buyout company. They can buy whichever company from any industry as compared to venture Capital, who is very picky.
Advantages of Private Equity
- It offers exposure through connections. It is thus benefiting in terms of market network and knowledge base.
- There are no debts to pay. This makes it easy to channel your energies into growing the business.
- Since private equities have deep pockets, your credit history will not be affected.
Disadvantages of Private Equity
- There is a conflict of interest, especially when it comes to decision making and operations. This is because each side will have their own way of how to go about different conflicts as they arise.
- You will be sharing profits as well as the control of the business.
They are individuals with high net worth who invest in new or small business enterprises. They provide funding in exchange for some equity in the company. Currently, that idea is growing to a point where there is crowdsourcing. Angel Investors are very helpful in ensuring that their investment bears fruits.
Most of the time, they join the company at the startup stage. Consequently, it is wise for any entrepreneur to have a clear understanding of the angel investor on what they are contributing. This will ensure there is no conflict of interest. Some of the angel investors can be:
- Friends and family members being on top of the list as it is the most common source of funds. But again, you need to be open with them as relationships can be ruined.
- Crowdfunding. It has become another popular way of getting startup funding. People can find your company through online forms.
- Wealthy groups are becoming more prominent. This can be a group of angel investors and thus increases Capital.
- Wealthy individuals. These are people who would want to invest in your business. They can be found within your friends or connections by word of mouth.
Advantages of angel investors.
- It’s much safer as compared to debt financing. This means that if the business doesn’t succeed, you don’t have to pay back the lost Capital.
- Angel investors mostly invest in people. This means that they will invest if they believe in you and your passion.
- You achieve a lot of their support and connections. This means that even when your projects are complete, you will get a good market.
Disadvantages of angel investors
- Their investment is usually relatively small as you would want.
- Complete loss of control as part-owner of the company, which means that you will also be sharing all the profits.
- They are difficult to come by, as not all will agree with your terms.
- Again, since their Capital is less, you might need some more investors.
It is fair to say that you need the right idea and people to take your new company to the next level. It is also good to note that you need venture funding to break even and also to survive. Getting the right venture capitalist is the key to moving your business to a big league. Finally, I leave you with a quote, “Think long, Dream Big, Act Decisively” Neil Shen.