Capital is essential to drive growth or begin for start-ups. Start-ups should therefore know when to seek external investment from investors as Venture Capitalists and understand their ways and how they work, as it can be a big decision for start-ups to make.
Unfortunately a lot of start-ups jump into work or agreement with Venture Capitalists without knowing for sure how they their system works.
Here are things Start-ups should know about Venture Capitalists.
- Have a clear understanding of a VC and the difference from an Angel Investor. Angel Investors are usually those individuals who are driven to invest in companies in a particular country or industry due to their interest – “closer to home”. Venture Capitalists simply want to make money over a certain period of time – which tends to be seven years. Venture Capital funds are larger network of money as they involve individuals, corporations and so on.
- How do VC funds work? VC fund is a gathered amount of money raised from wealthy individuals and companies, kept in place and eventually placed or invested in value worthy or promising companies. There are always active funds in the portfolio of a venture capitalist. Understand that the money is not all put out at once, but rather the manager in charge of funds decides when and where the fund would flow to, as there is constant pressure to make investments in new and promising companies. There is always the initial investments and follow-on investments as the company grows. But note that the fund’s manager would only focus on the succeeding companies with good performances while abandoning the poor performing as there is no point in throwing good money towards the bad.
- Be familiar with how VC make their money. Money of Venture Capital is made from cashing in a few years later when the company goes public or is sold after helping the company grow and develop value. A huge return of 2 – 10 times their investment is expected. The return is huge because the investors need impressive returns from firms to clear losses elsewhere, as most failed start-ups are VC funded – not all companies succeed.
- The VC investor would be your partner. Signing an agreement of investment with a Venture Capital firm, you should understand that not all decision making depends on you alone. The VC partner would be among your board which gives you a sharper edge as you would have the advice and inclusion of someone who is in business circles even outside your own. Therefore, choosing a VC partner is a very important step, as it has to be someone you can trust and build a good business relationship with. Understand that you cannot fire a VC partner and you cannot get rid of them. So choose right!
- You are definitely giving up some control. No investor is going to pump in a huge amount of money in your business and turn a blind eye to what happens in the business. Once the VC signs the first check, understand that the VC is going to have a say in how the company operates. If there are several investors, the one who pumped in the largest sum in your business would be the lead, and the lead lawyer would take care of the negotiations of terms and the other investors who are secondary follow up behind.
- Know the environment and understand what is happening in the VC space as well, not just the space of your business.