The U.S. economy depends heavily on venture capital, but separating the myths from the facts about this vital sector will help entrepreneurs comprehend it and make wise decisions for their companies. One myth is that VCs fund basic innovation, but that is a misleading view. Corporations and universities support the most basic creation.
How to Find a VC Firm
Getting the attention of a venture capitalist can take time and effort. Often, it’s all about who you know. Developing personal relationships with VCs like Brad Kern and their onboard team can help remove many roadblocks to funding your business idea. It’s also important to be clear and concise when explaining your business to a VC. VCs spend their days vetting new investments and helping companies in their existing portfolio succeed (often as board members). VCs want to be sure that there’s an established market for your product or service, that you have a competitive advantage, and that the company can grow and become profitable. They’ll also want to see your business plan in a specific format. You can use a business plan template to easily create your business plan in the precise structure VCs seek. It will increase your odds of securing funding.
What to Expect from a VC Firm
As the name suggests, venture capitalists pool resources from multiple investors to take on significant risks in start-up companies, hoping to earn substantial returns. VCs are different from angel investors, who invest their own money, and they are not the same as private equity firms or hedge funds. During the early stages of venture-backed companies, a VC firm will invest in seed financing (also known as Series A funding). It is designed to support growth until the company can prove that its product or service meets market demand.
During this phase, a VC will conduct due diligence, thoroughly investigating the company’s business model, products, and management history. VCs focus on the middle part of the classic industry S-curve, avoiding the earliest phases of new technologies and those in the later stages that have already reached their peak and are destined for a competitive shakeout or consolidation. They also avoid industries requiring long periods for a technology to reach the point where it can be marketed.
How a VC Firm Will Help You
Venture capital firms vet entrepreneurs and start-up companies to seek out promising deals. They package these investments into a venture capital fund and market it to limited partners to raise capital commitments. They also supply funding and guidance to start-ups. Additionally, they maintain contact with investment bankers to discuss prospective exit strategies for the companies in their portfolio. VC firms prefer to invest in industries with good growth prospects and relatively competitively forgiving. In other words, they focus on the middle of the classic industry S-curve. They avoid the early stages, when technologies are uncertain and markets are untested and the late stages, when competitive shakeouts and consolidations cause growth rates to slow dramatically. VCs want to see passionate founders with solid business skills and a product that stands out and fills an important need. They look for companies that can earn them back ten to fifty times their initial investment.
What to Expect from Your VC Firm
The popular image of venture capitalists as sage advisers to young companies is at odds with the financial incentives that motivate them. Partners at VC firms want to manage as much money as possible, so they need more time to nurture and advise entrepreneurs. A typical day may begin with an early morning meeting where the firm’s due diligence team discusses a potential new investment. A firm-wide vote might be scheduled the next day to decide whether to add this company to the portfolio. Then, the VC may spend the afternoon interacting with a current portfolio company to discuss its performance and how it can improve. The VC will also ask about any major milestones you aim to achieve and how your technology can differentiate itself from its competition. You’ll also need to provide a timeline for your business, competitive analysis and feedback from potential customers. This information will help the VC determine how risky it is to invest in your company and how much capital it can expect to return.