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| Investment Funds |
The rapidly expanding venture capital
industry is providing the startup world with the much-needed impetus. While the
VC industry has already become a potential driver for the US economy, the Southeast
Asian countries have also started witnessing the gradual influence of venture
capital on potential startups. The city-state of Singapore is already on its
way to become the Silicon Valley of Southeast Asia owing to its fast developing
VC industry. As an entrepreneur, if you are willing to raise venture capital
for your startup, it would be a good idea to gather some information on how
exactly the venture capitalists manage their investment funds and make profit.
Where Do The VC Investment Funds Come From?
I am sure you will be one of the happiest
persons on earth after successfully raising your startup with venture capital.
But then, how would you feel if you realize someday that you don’t really know
where the VC investment funds
actually come from? There must be someone to provide fund to the venture
capitalists, right? So who they are?
Well, a major portion of the Dollars come
from LPs, i.e. limited partner investors that mainly include large institutions
like pension funds, charitable foundations, endowments, insurance firms and
other wealthy individuals or families, corporations and a small percentage from
HNIs as well. Typically, the contribution from the major partners of a venture
capital firm is only 1 percent of the total investment fund.
How Do They Utilize The Fund?
The VCs usually pour their investors’
money in high-growth industries like Telecommunications, Software, Multimedia,
E commerce and others. This is quite contrary to the myth that the VCs look
only for good ideas. They, in fact, pick up one or a few growing industries and
then look for innovative ideas in that sector.
Next to industry is the stage of
development of the firm that they take into consideration. Venture capital
firms prefer to avoid seed stage investments as the business at that stage is
quite uncertain and the risk factor is very high. They try to meet their
investors’ expectations by taking moderate risks and ensuring a huge ROI.
Though there are VC firms that make seed-stage investments, the major interest
is most at the growth stage (once commercialization begins).
To minimize the risk, the VCs usually
invest in groups, i.e. two or more venture capitalists invest in a single
startup to share the risk and gain returns from a moderate investments. This
strategy not only decreases their workload but also gives them the opportunity
to explore other investment opportunities in the market.
They expect a return of 25 percent to 35
percent on each year’s investment in the startup and the tenure usually ranges
from 3 to 5 years. During this tenure, they provide the investee company with
many additional services apart from capital, such as, offering guidance and
knowledge sharing, contacts sharing, offering help in building business
strategies and deciding exit-policies.
How Do They Choose Their Portfolio Companies?
The VCs usually choose their portfolio
companies based on certain prerequisites like a unique business idea, an
innovative business model, a sizable and scalable market, a great management team with excellent
knowledge of management and finance, a strong pitch that drive their interest,
business valuation papers and other important documents related to the origin
of the business and most importantly a strong value proposition.
How Do They Protect Their Investments?
Typically, a VC firm prefers to become a
part of the management team of the investee company and also takes part in
critical board meetings. They desperately come forward to express their opinion
on financial matters just to ensure that the fund they have invested is
directed in the right direction so that each and every penny contributes to the
overall ROI. Apart from this, they also prefer to invest in more than one
startups to ensure that even if one deal fails, the other one manages to cover
up the loss.
Conclusion
So that was just a small introduction to
how exactly a venture capital firm operates. Hope the above information helps
you in your overall research on the VC industry. If you have already
kickstarted your venture capital raising campaign, you must see to it that you
chase only the right investor, i.e. the one who is interested in the industry
you are dealing with as I mentioned above. Also, remember to have all the
prerequisites in the right place so that you don’t have to stumble at any point
of time while in front of a potential investor.
Do share with us your capital raising experiences
with us in the comment box given below.
Good luck!
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