In our venture capital blog series we aim to give you the lowdown on the different types of venture capital firms, whether venture capital investment is right for your company and if so, how to pitch to them. So far we have covered early investing venture capital and this week we provide an overview of venture capital firms and their investment types.
What is a Venture Capitalist (VC)?
A venture capitalist (VC) is a private equity investor that invests other people’s money in companies that have high growth potential in exchange for an equity stake. VCs are risk takers – many of the companies they invest in fail but the opportunity for a huge return on investment on one success makes it an attractive offer.
So let’s discuss some key pieces of information you will need to know about VCs if you’re considering getting in bed with them:
Big market, lots of money!
VCs want (and need in order to be successful and gain approval for the investment) to invest in businesses that offer a product or service that have a big market in which lots of money is being spent – extra points if the market is growing! When do VCs invest in businesses?
VCs tend to focus on businesses that are in the middle of the classic industry S-curve. They likely pass on early stage companies as their product or service is uncertain and market needs are unknown, and the later stages when growth rates slow down to an unattractive rate. As we saw in Early Bird Venture Capital, there are outliers to this but they still won’t be providing anything pre-seed or much later than the adolescent phase.
How risky are venture capital investments?
Although there is higher risk than something a bank would invest in, VCs are highly skilled at identifying the sectors that they will invest in, and won’t take unnecessary risks such as putting money into an unproven market area. As they are investing in companies in the high growth part of their journey, the risk is in the ability of the company to make good on their projections of success.
VCs reduce risk further by often co-investing with other VCs so would look for opportunities with a couple of other firms investing in the stage. This enables them to invest in more for their money and reduces the work they need to put into a single investment.
Will Venture Capitalists invest in your business?
Due to the stakes involved, and the risk of investing in high growth businesses, VCs are looking for a solid business with strong leadership to invest in. As we discussed in what angel investors look for in startups, VCs are looking for similar things in your business as angel investors, with a few more elements thrown in:
- The potential to make money
- Large market size and large potential cut of market
- Product uniqueness for competitive advantage
- A great leadership team team
- A very specific plan for spending the investment
- Will you accept giving a large equity share over to the VC?
- An exit strategy
Due to the size of their portfolios, VCs don’t have masses of time to invest in nurturing your business, so there will be need a strong team in place able to deliver – so if you’re wet behind the ears and need support, it may be beneficial to bring in outside advice if you’re going down the VC route.
As with other business relationships, VCs will have their own personality and outlook on their investment portfolio. Whether they want to invest only in sustainable and complementary businesses, or go for any company that will give them the biggest potential payout, it’s essential to research each company you are considering to understand what they want and if you’re the right fit. It’s a long process seeking investment, so best to start off with VCs that on paper would invest in your company.