In providing funds to high potential early stage companies, venture capital plays an important role. The Money invested in an innovative enterprise in the form of a fund, in which both the potential for profit and the risk of loss are considerable is known as Venture Capital Funds. This type of funding has played a significant role in uplifting many companies such as Apple, Amazon, and Google.
For a better understanding, these important points should be kept in mind.
1. VC funders usually do not go for pre-revenue businesses. Hence it is not the first step of your business. You need to fulfill specific criteria to get your funds.
2. VC funding has various stages:
A. When the company has a growing number of customers
B. The company makes sizable revenues
C. The company is mature and close to exit
You do not have to repay the VC fund, but Venture Capitalists do posses an equity share in your company. In addition to the financial capital, they also provide expertise, advice, and industrial connections.
3. Venture Capitalists usually look to deploy millions and billions of dollars and they are seeking a return much greater than the amount deployed. They focus mainly on the size of the market; if the size of your market is small they likely won't invest. Hence, it is important for you to know the size of your market before going out for VC funds.
4. It is important for you to understand the fund cycle. Funders usually do two "A" stage deals per quarter. If the funder has already done 4 "A" stage deals, it is unlikely they will do another. As a founder you should have knowledge regarding the funders per quarter investments.
5. Venture Capitalists expect founders to use their network and get introductions. This negates three boxes
- Founder's understanding of how VC functions
- To get the introduction and the ability to hustle
- A trusted connection via someone who knows the founder
This reduces the risks of backing a business for both the founder and the venture capitalists. The deal comes with restriction and a compromise on the autonomy of the company.
6. You need to understand the funding process. Most funds approve funding through a partner meeting. During meetings, existing investments and new investments to be made are discussed. As a founder, your goal is to get that meeting and to get an approved investment for your own business.
7. If a venture capitalist is interested, he will offer the founder a term sheet. The sheet covers the economic and governing terms of the investment. It usually contains valuation of the company, investor rights, board composition, option pool, voting rights, etc. Term sheets are complicated and will require lawyers to review and negotiate on them.
8. Venture capital funds can act as a stimulus for your business. They increase the speed of your growth, which would have taken a long time while waiting for the revenues. It will also help you by funding a bigger sum in a smaller time.