Thursday, 26 July 2012

How does Venture Capital (VC) Work?

Just imagine for a second that you are that buzzing entrepreneur looking for capital to plough into your latest project; traditional lending institution’s doors are closed, but you then hear about ‘Venture Capital’ (VC) and you wonder: “what is VC and how does it work?” 

This article serves as an overview of the world of VC, from its definition, to how best to approach VCs.

What is Venture Capital? 
VC is an alternative investment asset class. 
Given that alternative investment assets have higher risk profiles, the expected return to investors in this space is commensurately higher. VCs provides risk capital to early stage businesses where there is substantial project risk and perceived (exponential) long-term growth potential. The investment is made in equity as opposed to debt (such as a bank loan) with the expectation that at a later stage (the ‘exit’), it can be sold for a significant profit

VC firms invest in biotech, healthcare, IT and software. These industries are scalable and have a strong track record of delivering high returns. But despite individual successes, most startups  fail and fewer will break-even. VCs have to invest in a number of firms to find the ones that return large enough margins to bail out the portfolio. In reality, less than 10% of a portfolio’s investment is successful enough to return 5-10x, which is a minimum requirement in order to break even on the entire portfolio.

Types of VCs
There are various types, but the common ones are: institutional, corporate and angel syndicates. Institutional VCs like Atomico and Accel Partners are usually structured as a partnership. Corporate VCs are departments within or subsidiaries of large companies which invest in start-ups. They primarily invest within their core business area where they can add most value to the startup and vice versa. Examples of corporate VCs are GM Ventures and Siemens Ventures. Angel syndicates, such as Beer and Partners, pool together a number of Angel investors. With an aggregated fund they have the financial clout of traditional VCs but without the (un?)necessary structure. Sometimes, they are also referred to as Super Angels.

Structure of a VC firm
Most VC firms are structured as partnerships with two types of stakeholders: the general partner (GP) and one or more limited partners (LP). Limited partners are usually institutional investors like banks, university endowment funds, insurance companies, foundations, pooled investment vehicles and high net worth individuals (HNWIs). LPs commit a fixed amount of money to the fund. The GP is the actual VC firm and is in charge of managing the fund’s investment and will typically have some skin in the game by committing anywhere between 5% and 15% of the fund’s capital. Initially, the GP is paid 2% of the fund size in management fees and 20% of profits in excess of an agreed threshold that returns all the LP invested capital as well as compensates the LPs for the risk. A typical fund has a lifespan of 7-10 years.

Process of Venture Capital 
Operators within a VC firm i.e. GPs add value to their portfolio companies by bringing their networks, technical and managerial expertise to the table. Usually, entrepreneurs seek VC investment after there has already been a round of investment from what are usually called the 3Fs: Friends, Family and Fools; other rounds of investment may also come from seed and Angel investors. VCs normally invest between 1-10 million EUR/GBP/USD in a company which has some traction. Traction is defined by key metrics for that industry e.g. a growing customer base, merchant contracts signed, hours spent on site, click-throughs, etc. However, cash is king and every VC prefers to see revenue although most will not readily admit it. On a more positive note, there have been recent developments which empower entrepreneurs and this may influence a VC’s decision on when to invest. Some of these include the rise of crowdfunding; increase in secondary markets; and online resources such as AngelList which pair up investors with entrepreneurs.

How to approach a VC?
VCs typically receive more than 700 business plans a year, so first impressions are extremely important in this industry. Following the business plan - and if the VC thinks there is potential in the business idea - there will be a first meeting during which the entrepreneur usually pitches to the VC about his business idea. It usually takes between 3-6 months or sometimes even up to a year between the first meeting and an investment. Thereafter, there can also be further rounds of investment from VCs, and if all goes well, there is an eventual exit. An exit usually means a trade sale i.e. selling the business to a larger business - for example Facebook’s acquisition of Instagram - or an initial public offering (IPO).

Advisors
Obtaining funding from VCs can be a gruelling process; one that entrepreneurs dread as they fear it takes them away from managing and growing their business. It is actually estimated that only 3% of businesses in the market successfully raise VC or Angel funding. However, there is capital! Last year, venture capitalist members of British Venture Capital Association invested 347 million GBP in 407 companies. One just has to ensure that one is investment ready to access this capital. Some consultancies or advisory firms exist to make life easier for entrepreneurs and their start-ups, by providing support and guidance through the fund-raising process. As only 2-5% of businesses in the market are deemed investment ready, it could potentially be beneficial for start-ups to engage with such advisors. Although some may say that engaging with such firms takes much needed capital out of the business, the positive benefit of such engagement is that it enables the entrepreneur to focus on what he/she knows best: growing the business.

82 comments:

  1. Very informative article and a good insight into venture capital. Down to earth and easy to understand.

    Thanks for sharing!

    ReplyDelete
  2. Excellent post. I hope many people will get advantage from this post.Tampa Bankruptcy Attorney .

    ReplyDelete
  3. Hi, I apreciate your writing. Now-a-day, it's financial crisis all over the world. Venture capitalists can be individuals who invest in businesses or they can be complex multinational investors. This is a great discussion. Keep your blog up! thanks all!~ John S.

    ReplyDelete
  4. Investors are expert speculators who have practical experience in subsidizing and building youthful, imaginative endeavors. Financial speculators are long haul financial specialists who take an involved methodology with the majority of their ventures and eagerly work with entrepreneurial administration groups to manufacture incredible organizations. I am a Will & Real Estate Lawyers In Toronto, Regularly We are faceing these kind of cases.

    ReplyDelete
  5. Panerai Ferrari Granturismo Watches are absolutely fashionable and absurd looking. They may be abundant watches for hermes replica men who admiration an adorable but abiding watch. Panerai Ferrari Granturismo Watches accept a 45 mm advanced case and are 16 mm thick. This amplitude is beyond than a lot of men’s watches, but looks abundant bigger on the wrist.Owning a genuine IWC appearance would accomplish you feel the compression if you anytime are mugged and your hefty alarm is stolen. Though purchasing an IWC replica watch you’ll not absolutely feel exactly the louis vuitton replica aforementioned because it absolutely is at reasonable rate. It by no agency fails you in agreement of time befitting abilities, the top superior of the materials, craftsmanship, etc.Owning a
    breathtaking reproduction of a Patek Philippe appearance is artlessly an get away. At
    Montresen.com applicant achievement is top priority. With rapidly delivery, affable chump assistance, a affirmed accomplished account and appetite for chump excellence, accepting a Patek Philippe appearance is an breitling replica affordable and simple procedure. Patek Philippe reproduction watches are abundant to bout the adorableness and acceptable superior that Montresen.com stands driving. Montresen.com ships to a lot of omega replica countries and if an account is confused aural an 8-week period, the applicant can appeal a acquittance or can appeal a backup appearance in the matching value. Import duties and taxes could be the chump responsibility. When ordering commodity from the provider all applicant allege to, announcement advice and acquirement buy advice ability be accepted above-mentioned to the addition of merchandise.Own a single of replica watches our Jaeger-LeCoultre reproduction watches for a agitating amount tag. Be the backbiting of your buddies and acquaintances already they see the appearance in your wrist. They’re traveling to accept you paid out so a lot additional. We’re assertive which you will acceptable be afresh for a abundant accord added of our reproduction Jaeger-LeCoultre watches. We would like your business like a echo customer.





    ReplyDelete
  6. I can not stop reading this. And 'so fresh, so full of information, I do not know. I'm glad that people actually write the smart way to show the different sides of him.

    ReplyDelete
  7. Replies
    1. Chaudhry Moonis Elahi is a True Leader for the nation. He inspires me and I must say that I haven't seen any politician
      like him. He never insults opposition in an uneducated and demoralizing manner like Abid Sher Ali and
      Rana Sanaullah. PMLN and PPP should be in the gutters now.

      Delete
  8. Pega is a Java-based BPM tool which is used to build enterprise applications. Among all the BPM tools in the market Pega is the leading and No-1 BPM tool according to market standards far

    beyond its competitors. Pega enables in creating and managing web-based applications with less effort and faster deadlines using Agile or Scrum methodology.
    Pega Training |
    AWS Training |
    Informatica MDM Training |
    PlSQL Training |
    Qlikview Training |
    Teradata Training

    ReplyDelete
    Replies
    1. Superb! I am really impressed with your content!keep it up!!
      Ch. Moonis elahi

      Delete
  9. If you ever needed to transfer files from one device to another then you need to download the SHAREit app. Shareit for PC

    ReplyDelete
  10. Download SHAREit for PC on Windows 8, Windows 7 Computer. Shareit for PC

    ReplyDelete
  11. lenovo SHAREit for PC is the best solution to transfer data from one to another device. SHAREit for PC

    ReplyDelete
  12. its really great information Thank you sir And keep it up More Post
    CBSE Result 2017

    Awesome stuff is being shared by you
    CBSE 10th Result

    I must say indeed an awesome post and just loved the whole read.
    CBSE 12th Result

    ReplyDelete
  13. Thanks with regard to offering this type of good written content.
    Kerala SSLC Result 2017
    Great internet site! It looks very good! Sustain the excellent work!
    Karnataka SSLC Result 2017
    Great info available on few clicks on
    Tamilnadu SSLC Result 2017

    ReplyDelete
  14. its really great information Thank you sir And keep it up More Post
    CBSE Result

    Awesome stuff is being shared by you
    CBSE 10th Class Result

    I must say indeed an awesome post and just loved the whole read.
    CBSE 12th Class Result

    ReplyDelete
  15. Free Download SHAREit for PC Laptop Windows 10,Windows 7/8/8.1. SHAREit for PC

    ReplyDelete
  16. Very interesting blog. Alot of blogs I see these days don't really provide anything that I'm interested in, but I'm most definately interested in this one.
    JEE Main Result 2017
    JEE Mans result

    JEE Mains Result 2017
    JEE Main 2017 Result

    ReplyDelete
  17. Great post. Thankyou for sharing this post.

    Watch IPL Live Score ,IPL Scorecard , IPL Latest News & IPL 2017 Schedule


    Good Friday Images
    | Good Friday 2017 | Good Friday Images 2017 | Good Friday Images Download


    Ganesh Chaturthi Wishes | Ganesh Chaturthi images | Ganesh Chaturthi 2017 | Ganesh Chaturthi Images 2017

    ReplyDelete
  18. Very interesting blog. Alot of blogs I see these days don't really provide anything that I'm interested in, but I'm most definately interested in this one.
    JEE Main Admit Card
    GATE Result 2017
    JEE Main Admit Card 2017
    GATE 2017 Result 2017

    ReplyDelete
  19. http://eportfolio.usc.edu.tw/~46728/blog?category=30&node=000000036
    Soon BSEB will be going to release Bihar 12th Result 2017 and Bihar 10th Result 2017 in the month of may 2017


    To get The Wallpaper of

    Teddy Day Images 2017
    Promise Day Images 2017
    Rose Day Images 2017

    ReplyDelete
  20. Maharashtra board will publish the ssc result 2017 soon.

    ReplyDelete
  21. Nice blog on Venture Capital. Its help to understand.
    Get Board Exam Result 2017 12th Time table 2017
    10th Time table 2017
    10th board model papers on official site.

    ReplyDelete
  22. Maharashtra board will publish the ssc result 2017 soon.

    ReplyDelete
  23. Maharashtra board will publish
    IPL 2017 ticket

    ReplyDelete
  24. 20170302SHIZHON
    sac louis vuitton 0.114039778
    kate spade outlet online 0.588434079
    jordan shoes 0.200589587
    sac longchamp 0.848378225
    jordan femmes pas cher 0.22756622
    nike flyknit 0.061470103
    curry shoes 0.890906447
    ugg canada 0.637325313
    pandora charms sale clearance 0.969356828
    adidas superstar shoes 0.452502263

    ReplyDelete
  25. Very interesting blog. Alot of blogs I see these days don't really provide anything that I'm interested in, but I'm most definately interested in this one.
    OUCET Hall Ticket 2017
    TSRJC Hall Ticket 2017
    APRJC Hall Ticket 2017
    AP ECET Hall Ticket 2017
    AP ECET 2017

    ReplyDelete
  26. Jobs Chat is one of the biggest Indian Job Site so here you will getGovt jobs in andhrapradeshso

    ReplyDelete
  27. The miracle of life nurtured by a woman who gave us love and sacrifice.mothers day presents. Happy Mothers Day.

    ReplyDelete

What are your thoughts?