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What is Venture Capital?

Posted by Travis Levell on 2014-08-26

Many entrepreneurs require funding for their company or idea. Although funding may not always be a necessity as early on as many founders think (See: Bootstrapping) the large benefit that it does offer is the fact that with funding, things can executed either much more quickly, be launched on a much larger scale, or both. Before deciding what type of funding that you may need, it is important to discover what type of funding options you have.

In our Startup Funding Demystified series we uncover the inner workings of one of the most sought after things in entrepreneurship. Funding. Whether you are only an aspiring entrepreneur or have already started a company we are presenting some valuable information that will help anyone in their journey.

So what is venture capital?

Definition: According to Investopedia a Venture Capitalist (VC) is “An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.”

Analysis: In funding, different venture capitalists and firms invest anywhere from seed funding to later series. Although for seed funding VC’s generally have higher requirements than angel investors these are some guidelines for Series A funding and beyond. In this case VC’s are usually the step after successful Angel Funding and significant progress, or great company progress without funding. Although every startup has a unique funding path and all situations are different VC’s generally only invest $500K or more in companies. This means that you have to work your company up to having a higher valuation before the typical venture capitalist will look at you as a good opportunity. Some things that many venture capitalists look for in companies are:

  • Significant Prior funding (See: Angel Investing)

  • Notable Traction

  • A capable and preferably proven team with proven advisors

  • An actionable, clear and attainable direction and plan for what you will do with your funding

  • A large potential market, with revenue potential $100M+ per year

  • A strong product market fit

While the world of venture capital is very broad and much more complicated than Angel Investing it has been said many times before that a majority of VC’s are often on the hunt for deals that have the potential to become the next Facebook or Google. Which, of course, any VC would love to have companies like those in their portfolio but in reality VC’s know that the probability of that is very low and on a more realistic scale they are looking for deals that could become the next Snapchat, Netflix, Uber, Instagram or WhatsApp. These are all still major successes, but more realistic than the giants.  

The only thing that early founders need to keep in mind, is that it is very risky for Venture Capitalists to invest in early companies, and they make the bulk of their money with the companies that make it big. Therefore you will want to present a case that shows that your company has the potential to make it to the level of the most successful companies.

In fact according to The National Venture Capital Association’s statistics 40% of venture backed companies fail, 40% of them return little to moderate capital, and only 20% or less produce high returns.

Every VC looks for something specific, so always make sure to do in depth research of what a VC or VC firm looks for in companies before you speak to them. You should always aim to highlight how your company can give them what they are looking for.

When you don’t need Venture Funding

An important decision that you should make in your company is whether or not you need venture funding. Often times, Venture Capitalists will want to take a large part of your company for the capital that they provide and many entrepreneurs do not want to dilute their own amount equity in their company. With fundraising being a daunting task, often taking months if not years for the chance to raise money there are more situations than most would think where you may want to bypass venture funding.

If you can attain revenue and grow without VC funding, you may want to bypass it.

Simply put, only a very small percentage of companies actually get any kind of venture funding. So if it is not instrumental to your company’s success you may want to start planning now to grow without it.

In the end, it is the companies that will survive no matter what, funding or no funding that end up being the great companies.

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