Wednesday, 7 October 2015

From Raising Investment Funds To Making Profit - How VC Firms Execute It

Raising Investment Funds

While your journey as a first-time entrepreneur raising venture capital is filled with challenges, the story on the other side also has a lot of twists and turns that ultimately result in huge profit. My years of observation and experience says that it is equally challenging for VC firms to raise and manage their investment funds as it is for seed-stage entrepreneurs making the best of their efforts to convince a potential investor.

If you are on your way to attract venture capital for your startup, it would be my great pleasure to make the functioning a VC firm little more transparent to you so that you know where exactly you are heading and how your financiers will manage to back your startup.

The main goal of a venture capital firm is to make profit for its investors (the main source of fund) and its own team for which it sets out in search of potential markets that have the ability to get them back the desired returns.

Typically, the investors who pour money in venture investment funds include limited partner investors that comprises of endowment funds, pension funds, charitable organizations, investment firms and others wealthy individuals or groups. Once VCs collect the fund, it becomes their first responsibility to get their investors a good ROI which, naturally, makes them go choosy with startups.

The fund primarily operates through other people’s money while the firm’s major partners’ contribution is only 1 percent of the total fund.

Once there is enough fund, VCs target growing industries like Technology, Telecommunication, Energy, Finance, Real Estate and other sectors for investment opportunities. They make their choices in two different segments, one is the industry and the other is the stage of investment. Typically, they are more interested in the growth stage due to lower risk, however, there are many who are willing to invest in the seed stage. Some VCs invest in the all the stages including seed, early, growth and later stage.

However, it is not just about having the fund and investing it somewhere but also about ensuring that the fund is utilized in the most productive manner to ensure high revenues. The more revenues you earn, the higher is their share of profit so they not only examine your startup's potential but also fill themselves with up with adequate knowledge about your industry. This helps them study the market analytics of the sector and offer you necessary guidance and mentorship whenever and wherever needed.

While choosing a portfolio company, VCs usually look for certain prerequisites like a unique idea, a sizable market, a smart and efficient team with great knowledge of management and finance, a group of beta customers and an innovative business model. Absence of any one of these factors makes the investors either turn back or thin several times before investing.

Once they get in partnership with your startup, they (in most cases) choose to become a member of  your board and take participation in critical decision makings. If needed, they feel free to voice their opinion as they are not just investors but also masters of business management. With an unwavering aim to help your startup become successful, they offer sincere guidance and mentorship and also use their connections with other influential people in the industry to offer you more ideas on building better strategies.

Typically, venture capital companies expect a return of 25 to 35 percent on each year's’ investment. The tenure usually ranges from 3 to 8 years followed by exit with their share of profit. Right from the moment they get into partnership till exit, they strive their best to make things favorable for you so that you can gain enough market traction and earn enough revenues. They then distribute the profit share among their investors and also keep a percentage with them. To minimize risk, they usually make simultaneous investments in a number of companies so that if one investment fails, they can cover up the loss from the other startups.

So that’s how their investment funds snowball and return back bigger through your startup. If you are interested to know more about venture capital, feel free to visit Merger Alpha.

Do share with us your experiences with venture capital raising in the comment box given below.

Good luck!

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