VCs have unique challenges when evaluating startups. They need to strike while the iron is hot and seek opportunities with a large total addressable market (TAM). This means that doubling the size of the average portfolio would greatly benefit early stage investors. VCs need to see returns of 10-100x or higher before they will consider exiting a company. That means that their investment decisions have to be based on a mix of intuition and data.
A startup usually needs market research capital to launch and monitor its product. This capital helps fund the creation of a sample product, recruitment of key management, additional research, and finalization of a product or service. Then there is working capital, which includes production and marketing efforts. Once the business has been launched, investors may need additional funds to continue the development. While venture capitalists are willing to invest at all stages, it is critical to remember that they are not in business to make money on every investment.
Entrepreneurs are typically university graduates, but corporations also have a significant presence in this space. In fact, nearly all basic research funds come from government and corporate sources. However, universities and corporations are more effective at finding new ideas and turning them into businesses than most individuals are. Moreover, universities and corporations have pay structures that limit their upside in a company. However, in venture capital, there are no pay structure caps. This makes it easier for VCs to make more money.
Seed-stage funding is important for businesses at the start. This money is often used to address operational needs and grow. It is followed by successive funding rounds. Late-stage funding is less involved with VC firms and is more likely to involve private equity firms and hedge funds. It can also be used to fund expansion in a new market. VC firms are often reluctant to invest in these late-stage stages. However, if an investment is successful, it can create an excellent exit opportunity.
Before a VC firm considers a company, the founder should present a compelling pitch deck. The pitch deck describes the concept or technology that they’re developing. The business plan should detail financial details, and a breakeven analysis should also be included. Once the founders have successfully attracted the VC’s attention, the next step is due diligence. Due diligence involves checking assumptions and triple-checking statements within the business plan.
The early days of venture capital have been largely dominated by wealthy families and individuals. The Wallenbergs, Whitneys, Vanderbilts, and Morgans were among the notable investors in private companies. The Rockefellers were also significant investors. The Rockefellers helped finance Eastern Air Lines. They also had extensive holdings in many different companies. Venture capital started to become increasingly concentrated on the West Coast as the tech ecosystem grew.
The VCs typically offer more than just cash to start a company. They aim to have a meaningful impact on the growth trajectory of the company. Unlike most angel investors, VCs do not simply hand over their money. They seek a partnership role in the business and may require a seat on the board or consult with the startup’s founders. There are many advantages to working with venture capitalists. But if you’re looking for a high-growth company, you should look no further.
