What is Venture Capital?
These investments are private equity in nature. They are offered by investment firms or institutions to early-stage start-ups and developing organisations with tremendous growth potential (in terms of the number of employees, annual revenue, the scale of operations, etc.). In trade for equity or a share in the company, venture capital firms or funds invest in these businesses in the early stage.
They risk investing in high-risk start-ups in the hopes of witnessing a few of the businesses they back prevail. These fundings have a high risk of failure since start-ups face a lot of uncertainty. Start-ups in high-tech areas such as information technology (IT), clean technology, and biotechnology are typically founded on a new technology or business model.
Venture capital is also a tool for the public and private sectors to operate jointly to create an organisation that systematically creates enterprise networks for different industries and enterprises, permitting them to expand and advance. This organisation assists in identifying prospective new companies and providing financing, technical expertise, mentoring, personnel acquisition, strategic partnerships, marketing “know-how,” and business models.
These businesses are more likely to flourish once integrated into the business network, as they’ll become “nodes” in the search networks for designing and building items in their field. However, venture capitalists’ decisions are frequently skewed, reflecting traits such as overconfidence and the illusion of control, which are common in entrepreneurial choices.
Details about venture capital fund
Venture capital fund
Venture capital funds are a pooled investment vehicle that makes investments in startups in exchange for a share of the company’s ownership. Venture capital is a sort of private equity in which investments are not listed on a public stock exchange.
Investors can profit from venture capital funds in a variety of ways. A “liquidity event,” for example an initial public offering (IPO) or a merger with some other company, is the most common way for a fund to obtain returns. The proceeds will subsequently be dispersed pro-rata among the fund’s investors.
A “general partner” (GP) is the manager of a venture capital fund. They are in charge of obtaining funds from a pool of investors, and investments, picking and monitoring the fund’s operational, accounting, and legal elements. A GP will often select investments based on an investment thesis, which will target a specific market sector and/or investment stage.
What Support Venture Capital Funds Give to Startups?
A company’s success is heavily reliant on venture funding. According to HBR, more than 80% of venture investors’ money goes towards establishing the infrastructure needed to grow the business, including expense investments (production, marketing, and sales) and balance sheet investments (providing fixed assets and working capital).
Several venture fund managers advise their portfolio firms in addition to funding. Several VC firms have developed a reputation for assisting portfolio companies with recruitment, access to follow-on investment, customer acquisition, and other issues that startups face.
How do VCs raise funds?
The VC firm seeks out limited partners (LPs) for the new fund during the capital-raising phase. The procedure can take months or even years, depending on the firm’s reputation, fund strategy, and market conditions. The fund is usually closed to new investors once the target investment level has been attained.
Typically, VCs make money when one of their portfolio businesses does one of three things:
- An initial public offering (IPO) on a public stock exchange allows a portfolio company to go public.
- A portfolio firm merges or acquires another company; or
- The fund’s shares in a portfolio company are sold to another entity by the fund management.
Before releasing returns to investors, funds may wait for all of their positions to depart, or they may distribute returns when liquidity events occur.
Pre seed investment
It is when you start building your product or service prototype to see if your idea is viable and comes before the phases of venture finance. VCs are unlikely to grant capital in exchange for equity at this time, so you’ll have to rely on your resources and contacts to get your firm off the ground. Many entrepreneurs seek advice from founders who have had comparable pre seed investment experiences. With this guidance, you may start designing a winning business concept and a credible business strategy.
Seed stage startup
In the seed stage startup, the business now has some experience and can show that it has the potential to grow into a thriving enterprise. You’ll need a pitch deck now to show VCs that your idea is a good investment possibility. The majority of the little sums you raise in the seed stage startup are used for particular tasks such as market research, business plan development, management team formation, and product development. The idea is to raise enough money today to show prospective investors that you have the ability to scale and grow.
Series A funding
The initial round of venture capital funding is called Series A funding. At this point, your company should have finished its business strategy and created a pitch deck that focuses on product-market fit. You’re fine-tuning the product and building a customer base, demonstrating a steady revenue stream and ramping up marketing and advertising.
Series B funding
Your business is now ready to expand. This stage of venture finance supports actual product manufacturing, marketing, and sales operations. Series B Funding is not the same as Series A funding. Series B investors want to see real performance and evidence of a commercially viable product or service to justify further financing, whereas Series A investors want to see the potential. Investors will be more confident in you and your team if you demonstrate that you and your team can succeed on a broader scale.
Series C funding
When you reach the series C funding stage, you’re on a growth path. You’ve made it, and more money will enable you to develop new products, expand into other markets, and perhaps buy other firms. It takes about 2-3 years to get to this stage on a fast track, where you’re generating exponential growth and steady profitability.
Series D funding or mezzanine stage
Given that its products and services have gained sufficient traction, the company may decide to go public at this point. The money you get here can be utilised for things like:
- Acquisitions and mergers
- To drive out competitors, price reductions and other tactics are used.
- Investing in the procedures leading up to IPO.
When it comes to extending your consumer base, strategy, fine-tuning your market, recruiting the best team members and eventually succeeding, having a venture investor who can advise your company as a board member is particularly beneficial. Here comes InvestorBase which provides a platform to new founders and helps them guide them in the right direction of raising funds. Here, they can search for desired investors and get the insights which are required for them to pitch. Thus, there’s no need to fear that any idea will not work. Just come up with good ideas and InvestorBase will help provide a platform for pitching to the relevant investors.