Understanding Venture Capital
Venture Capital is currently a term that rolls off the tongue of any budding entrepreneur, but what does it mean, and how does it vary?
The history of Venture Capital
The term "Venture Capital" first appeared in the world in 1943. Initially, Venture Capital referred to the process of capital investment into war technologies, which in 1943 got repurposed for novel commercial functions. However, the word "venture" originally comes from England in the 1500’s, where they used it as an abbreviation for the word "adventure." As such, Venture was used to imply a certain "risk-taking," which later became associated with "chancy business undertakings."
Popularized by the Harvard Professor G. Doriot, Venture Capital is a substrate of Private Equity that exists primarily to fund innovative business ideas and Start-up companies in their developmental stages. The reason that this type of funding is associated with risk is because these companies are typically smaller and operate on a niche idea. As such, these companies are more susceptible to going bust before making a substantial profit, which means that investors risk losing their capital by funding these type of business endeavors.
So why take the risk?
In one sentence: high risk offers a high reward! The benefit of investing in start-ups is that the initial investment does not need to be big in order to reap a large return. The growth, revenue, and returns from start-ups in their formative stages increases at an exponentially greater rate than that of larger companies. This means that smaller investment returns can become lucrative in a shorter time.
Sources of Venture Capital
Venture Capital Firms (VC Firms)
Firms of this nature are usually structured as partnerships, consisting of people managing the investments – the "General Partners" – and people invest the funds used for the venture capital investments – the "Limited Partners.". VC Firms have a specific focus on innovative business models and start-up companies. In this, they offer investment via a process of seed funding, for which they obtain a certain equity or convertible bond of the company that they invest in.
Also known as High Net Worth Individuals (HNWI), investors of this nature are successful individuals or groups of individuals who have the capital to invest in start-ups. It is common that more than one Angel Investor, through a process of co-funding will provide funds to a start-up. Angel Investors usually have an entrepreneurial background themselves and tend to invest in areas of business in which they have experience and expertise.
These entities offer a combined approach of both funding and expertise. The role of Accelerators is to work alongside a start-up (usually for a short period of around 3 months) to help it fruition its maximum potential. Rather than providing just capital, they will provide experts from the relevant field, office space to work in, and introduce the start-up to any relevant business networks they have. Accelerators are like advisors who help you maximize what you can get from your resources and funding. They will use their assets, experience, and connections to improve the chances of enduring success in your business.
Getting your startup funding
When it comes to deciding your Venture Capital funding source, it is vital to consider which one suits your specific stage of development and business model.
If you going to pitch to a VC Firm, Angel Investor or Accelerator, make sure to get to know your audience beforehand. It’s essential that you know why this particular entity would be suited to your aims as a company and why it’s worthwhile for them to invest their time, money or expertise in you. Success with Venture Capital funding will come from having a coherent and pragmatic business plan, a well-organized cohort of people, and a ruthless work ethic.
These things should be prioritized before you consider making a request for funding. The more organized and well-directed your business model is, the less risk the investor will see and the higher your chance of funding approval. And on that note, there rests us nothing else to say but Good luck!