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!

What Investors Look For Prior To Venture Capital Financing

Venture Capital Financing 

That awesome moment when no one is showing confidence in your startup and then suddenly you find a venture capitalist ready to invest in your seed stage startup and enable you to turn your dream into reality! Wow! It’s a dream come true! But wait, attracting a VC for venture capital financing isn’t a game either.

As per researches, out of 100 startups, VCs usually select only 2 or 3 so you can easily figure out the toughness of the financing option. That said, if you have all the necessary things in the right place, you will always find it easier to grab the attention of a venture capital firm. Below are the most important factors that VCs take into consideration before investing in your business.

Most Important Aspects That A VC Would Look For In Your Startup

A Unique Idea

Your idea is the first thing that will catch their attention; if they find it interesting, innovative and competitive, they will definitely value it highly. Venture capital firms, typically, prefer to invest in high potential ideas which can be a product or service with huge demand in the market. You don’t have to create something completely new; even an innovative twist to an existing product or service can also bring in potential customers. This is the first thing that a VC would look for in your venture.

A Strong Value Proposition

Any business has to have a unique selling proposition that can compel customers to switch brand. If you can demonstrate to your customers why exactly a customer would buy your product/service, it is a win-win situation almost. You can create a superb working model of your business and bring in a set of beta customers to demonstrate market traction.

An Excellent Team

To implement and execute a brilliant idea, you need a brilliant team which is the next biggest requirement for attracting venture capital financing. Try to assemble the finest of finance and management experts for your leadership team as these experts are ultimately going to execute your idea and give a definite shape to your business. A smart, intelligent, innovative, committed and honest team can significantly increase the value of your startup so try to arrange it as early as you can.

Other Interested Investors

VC funding is very much based on demand you can drive for your startup among other investors. These investors would feel more interested if there are other investors standing on the line for your idea. This gives them the assurance that your idea is in demand and there are good chances of huge revenues. If you have more than one active investor for your startup, it is great achievement as you don’t have struggle much to prove the authenticity and potential of your business.

Conclusion

Try to ensure that all the the above aspects of your business are in the most desirable state so that you can easily convince a VC to think about your startup. Moreover, if you can bear 25 to 50 percent of the investment through your personal savings, it is undoubtedly be a head-turner for the investors. If that sounds impossible, then at least 10 percent is also good enough to prove your confidence in your startup. Money is there, all you need is to be present at the right place at the right time with the right set of things.

For more information on venture capital financing, feel free to visit http://mergeralpha.com.

How Do VC Firms Manage Their Investment Funds

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!