What is Venture Capital? What is it used for? And how does it work? What are the differences between venture capital and other investment funds? Let’s explore some of the common pitfalls of venture capital and how it works. A brief summary of the most important details will help you understand the process and the risks associated with it. After all, VC funds are designed to support startups and help them scale up. And they can be profitable too. However, there are some differences to be aware of, too.
First, you need to create a pitch deck, which is basically a PowerPoint presentation of your concept or technology. After that, you’ll need a detailed business plan explaining the financials of your business. Once you’ve got the VCs’ attention, you’ll be asked to undergo due diligence, which involves triple checking the statements and assumptions in your business plan. Once you’ve satisfied the VCs, you’ll receive a term sheet, which is essentially an offer to fund your business.
The problem with venture capital is that the majority of funds only invest in 20-40 companies. But doubling the average size of these funds would increase the return on investment for the industry as a whole. Ideally, the portfolio would have 50 to 100 companies. A larger portfolio means better chances of success for startups. But this is not to say that VCs are not interested in investing in startups whose growth potential is low. But they prefer to invest in those in high-growth industries that have a high probability of making massive returns.
A good VC will put significant time into the middle stage of a portfolio. They’ll assess the viability of a company based on its potential to turn a profit. As they are equity-owners, VCs also have the flexibility to make management changes. So, they’ll spend plenty of time evaluating companies before committing to them. If they don’t think it’s ready for this stage, they’ll pass up on the opportunity.
There are also risks involved in balancing LPs’ interests with responsibility. The former can benefit VCs by adding skills to startup companies while reducing risk. They don’t want to be the founder of a company; instead, they’re looking for an excellent risk-reward ratio. However, VCs must balance this risk with the opportunity to make an impact on society and the economy. For example, aggressive term sheets can damage the health of a cap table, while excessive founder friendliness can undermine corporate governance.
In the early stages, companies typically need funding to develop their product and market it. A Series A round of funding, or first institutional round, is typically provided by venture capital firms. The subsequent rounds of investment are called Series B and Series C. While this is the growth stage, the next step for most companies is the Series B and Series C rounds. In a venture capital fund, Series A represents the initial investment and the subsequent rounds are known as Series B and Series C.
