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Raising Investment Funds |
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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