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Role of Venture Capitalist

To provide funds for high risk but high return ventures. To arrange additional financing from other sources if required. Constantly assist study and revise the proposed business model and work on reformulating the overall strategy. Be on the look out identifying and employing key people and firing. Provide help in identifying supportive service companies and other business contacts. To buying-out existing partners (owners) where they think this is necessary. Provide operational and technical guidance to enhance overall business efficiency. To prepare the company for a potential exit (e.g. acquisition or initial public offering).

Types of venture capital

Seed funding is usually given for marketing research, concept testing, alpha and beta testing.  Startup funding is given to get started. Second-stage funding is given to expand to the next level.

Mezzanine financing is given to bail out troubled companies but with huge potential and usually given as debt funding but can be converted to equity.

What is the benefit to the VC?

Limited partners usually fund these funds. The people who manage are general partners. They are paid a management fee (1.5 to 3%) of the fund and a profit sharing (20 to 30 %). The fund life is 8 to 10 years and because of this the exit is around 3 to 7 years. As VCs add value to your company, that is why you must do research on VCs first.

Large VC funds do not mean VCs will invest in new ventures. Many older VCs sometimes avoid new startups and concentrate on shorter exit. Exit is by IPO, selling to others, management buyout and merger. Out of 10 ventures one will give huge return, two will give good returns, 3 will return investment and 4 will give no returns. VCs are looking at 2 to 20 times gain.

Steps to Approach VCs

  • Step 1 Investment Criteria

–          Usually you can get these from their websites. Some of these usual criteria are

  • Strong Management Team.
  • Differentiated Product or Services.
  • Large Market Opportunity.
  • Barriers to Entry
  • Visibility of Exit Mechanism.
  • Size of Investment.
  • Location.

–         Depending on the size of fund and success of their portfolio they will start off investing in early stage

–         Early startups require more work

–         Sometimes it is worth talking to experienced fund raisers

  • Step 2 Going on the Road-show

–         When you raise fund you are selling a portion of your company

–         No need to tell about “How fantastic your service or product is” just “What it will help to solve and not how it works”

–         It might be worth paying an expert to raise the fund

  • Step 3 Good Team

–         VCs invest in good teams and not the technology

–         They do not expect all members to be in place

–         A good VC helps to hire these at the right time

–         Team must be fully committed

  • Step 4 Pitching for funds

–         Do not send mass emails

–         It is a selling exercise

–         Target your pitching

–         Why do VCs fund?

  • Do your homework by looking at their portfolio
    • Background
    • Preferences
    • Likes and Dislikes
    • Try and get a reference i.e. accountants, lawyers etc
    • Get used to “NO”

VCs do and monitor

Structure the board and shareholding outside. Give equity based compensation for team members. Provide value added service and shapes the company by protecting their investment by playing an active role and limited outside involvement. They help in bring your product or service to market shorter. Fire founder CEO’s and hire new ones if necessary and this they do it extremely professionally. They hire via professional channels then informal channels. Play a supportive role and link up small companies with bigger ones.

What do VCs do after funding?

VCs do one of these things. Go IPO and sell all the shares, go IPO and sell part of the shares, fund further to next stage or sell the firm.

Now that we have explored how to get funding now you must be to apply the financial management we looked at in the previous articles.

3 comments to Role of Venture Capitalist

  • Alan Webb


    Very Good overall:-
    A thought for possible enhancement..

    It seems that the VC culture differs significantly depending upon country of VC origin. North America, for example, would tend to have very different VC culture to that of the UK. Essentially, the US has tended to have much bigger sums available and a culture of more scattergun investment from the VC community whereas the UK would have a very different landscape and possible much more risk averse. Admittedly, I’m no expert in this sort of area but I would suggest that it might enhance the article to have some reference to different VC cultures in different parts of the world and some advice how to approach this in different countries (perhaps limited to a few significant players as it’s a big world).

    Food for thought from an engineer/innovator Best Regards Alan Webb

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