What is Venture Capital?
As your business grows, venture capital may be necessary to get to the next level. Partnering with a venture capital firm can provide the money, connections, and skills you need to get to the next stage of your business. When you investigate this option, you may have questions about venture capital.
What does a venture capitalist look for when making an investment?
The ultimate goal of venture capitalists is to create value through investing in early-stage or start-up companies with strong high-growth potential and with an innovative, disruptive business model or product. Venture capital firms generally, although not exclusively, focus on businesses operating in the technology industries.
Venture capital support entrepreneurs in finding and developing their business model so that they can bring their product to market, satisfy a business or consumer need and create genuine value. Since the businesses are nascent, venture capital investors will take a disciplined and holistic approach in evaluating not only the viability of the business idea, but also the motivation and background of the entrepreneur. Ultimately, venture capitalists look for bright ideas and even brighter entrepreneurs, with the desire and motivation to see their idea through to success.
What are the different stages of venture capital investment?
There are different types of venture capital funding depending on the maturity of the business. The BVCA defines the stages of VC investment as:
Seed: Financing that allows a business concept to be developed, perhaps involving the production of a business plan, prototypes and additional research, prior to bringing a product to market and commencing large-scale manufacturing.
Start-up: Financing provided to companies for use in product development and initial marketing. Companies may be in the process of being setup or may have been in business for a short time, but have not yet sold their product commercially.
Other early stage: Financing provided to companies that have completed the product development stage and require further funds to initiate commercial manufacturing and sales. They may not yet be generating profits.
Late stage venture: Financing provided to companies that have reached a fairly stable growth rate; that is, not growing as fast as the rates attained in the early stage. These companies may or may not be profitable, but are more likely to be than in previous stages of development.
Expansion: Sometimes known as ‘development’ or ‘growth’ capital, provided for the growth and expansion of an operating company which is trading profitably. Capital may be used to finance increased production capacity, market or product development, and/ or to provide additional working capital.
How should a startup prepare itself for fundraising?
We recommend that all startup founders need to really know what they’re raising the money for and how far it can take them. All fundraise pitches should have that bottom-up clarity. If you can first raise a small amount of capital that you can afford to lose, then build a team that believes in you, build a product and test your conviction. If you’ve hit this mini milestone, it’s easier to build the mojo to go and pitch to institutional investors or even a larger group of angels.
If, for some reason, that can’t be done, you need to have believers in your network – either friends and family who will give you the capital to get started or get connected by people who vouch for you to a seed fund or an angel network. These people are making an emotional decision to invest or recommend you basis their past connections with you. A lot of the time, that’s the only way for a first time founder to get started. Serial entrepreneurs who’ve returned some capital to themselves or their investors in the past have it incredibly easy relatively speaking, since this first bit of seed money is usually coming in from their past investors.
Does BVCL provide mentoring if not funding?
We provide immense time and support to our portfolio companies. Founders also are very busy and often don’t respond, or given they are young, they don’t often see mentors in the right context. They end up treating them like consultants. Thus a lot of effort is needed to position mentors appropriately; time that we feel is better spent with our portfolio companies or evaluating our pipeline better.
In what ways do BVCL get involved with a company?
Essentially, venture capitalists use their investment to buy stakes and positions within new companies. This means that while the company accepting the investment is not required to repay the investment capital, the venture capitalist expects capital gains in return. The new business gets a large amount of money to grow operations and development while the entity making the investment is granted an active management role to guide the company toward success.
What kind of position does the BVCL take?
Once the investment has been made, the BVCL should be viewed as a partner. In terms of the aforementioned management position, this may come in the form of a seat on the company’s board of directors or via contributions to management decisions. It is the goal of the venture capitalist to see a return of 30 to 40 percent on the initial investment every year in which the entity is directly involved, which is usually a period of four to seven years. For the company, this means that an aggressive plan for growth must be implemented to meet this expectation.
In what ways does a venture capitalist benefit the business?
From a purely financial standpoint, a venture capitalist brings much needed funds into the company without any regular repayment required. The individual should not be considered some kind of lender, as he or she shares your hope for the company’s success. This means the company gets access to his or her network, experience and sense of discipline. This is not to mention the fact that the presence of a venture capitalist in your company gives it added credibility in the larger industry.
What do venture capitalists find attractive?
Contrary to what many might think, venture capitalists often place just as much weight on the strength of a company’s team of managers as they do on the product or service they sell when determining where to invest their funds. A product that’s hugely popular one year may be obsolete the next, but with a solid management team, these issues can be overcome. These managers should have cool heads and be receptive and encouraging to change and growth. Every venture capitalist is looking for a substantial return on his or her investment. If the company is in its infancy, the return rate needs to be higher to compensate for the risk. The business needs to be in a position for fast growth in products and management.