There is no doubt that business and innovation are the key factors to drive the economy. Almost every day we can read about the incredible success stories of Silicon Valley super-hero entrepreneurs. But these success stories have another side, which might not be visible to everyone. Venture capitalists are the people who are always there to help startup heroes to raise money along the way in exchange for company share, of course.
The truth is that there are some legendary venture capitalists that used their money and investing knowledge and experience, which is as a result helped to create the modern IT industry.
The deal logic
The deal structure varies but whatever the type is, the deal logic is always the same. The logic is to provide venture investors with downside protection and an impressive investment return if the company becomes successful.
Although recent valuations have been much higher, during a typical start up investment deal, the VC fund invests about $3 million in exchange for a 35-40% equity ownership.
The preferred provision is much important, as it provides downside protection. For example, the VC can get a liquidation preference. It, in some way, simulates debt by giving 100% preference over common shares that are held by co-founders or management until the VC’s investment is returned.
VC Investing stages
- Seed-stage investment
Seed-stage capital can be provided to help the business owner to help to develop the idea.
- Early-stage investment
This type of investment is provided for company initial operation. This stage mainly supports product development processes, marketing activities, etc.
- Later-stage investment
This investing is provided if the business already generates revenues but before an IPO. It includes capital needed for initial expansion (second-stage capital), This investment is needed for major scaling/ expansion, product improvement, mergers/ acquisition or to go public.
VCs always perform a detailed analysis of the submitted business applications to make a decision about taking up the project or no.
Step 1: Business plan submission
The very first step in approaching any VC is business plan submission. That plan must include business proposal executive summary, product market size, existing/ potential competitors, financial projections, details about company executives (including professional background).
Step 2: Meeting with investors
The meeting implies one to one meetings to discuss all the business details. The aim of the meeting is to decide whether or not to move forward with the business.
Step 3: Funding and term
Later on, the VC can offer a term sheet. It is a document that includes the terms and conditions of the investment agreement. Investment is negotiable. After the investment terms are agreed upon by all parties, funding process begins.
Advantages of Venture Capital Investment
- Investment helps to expand and scale the company
- Big investments attract industry best specialists to work in successful companies
- In addition money, VCs provide network, resources, additional assistance to make business even more successful
Disadvantages of Venture Capital Investment
- As the VC becomes a part of owners, it gains rights and control over the company
- Funding process is long and very complex
- Funding benefit is visible in the long run only
Where to Find VC Companies
Before applying for the investment, make sure you do a good research on the VC companies and make sure the company is suitable for your business.
Best 3 VC Funding Cases
Facebook’s $22B acquisition of WhatsApp in 2014 is still the largest private acquisition of a VC-backed company ever. It was also a big win for Sequoia Capital, the company’s only venture investor, which turned its $60M investment into $3B.
Facebook’s $16B IPO at a massive $104B valuation was a huge success for early investors Accel Partners and Breyer Capital. The firms led a $12.7M Series A into Facebook in 2005, taking a 15% stake in what was then called “Thefacebook.”
Groupon’s IPO in 2011 was the biggest IPO by a US web company since Google had gone public in 2007. Groupon was valued at nearly $13B, and the IPO raised $700M.
Although raising capital is a very difficult process, VC investments are a crucial component in startup or industry development. There is a myth that VCs are investing in good people and ideas, but the reality is that they invest in solid, promising ideas and good industries. Industries that are competitive, have big market opportunities and potential.