Venture Capital Fundamentals

• Venture capital can be easily understood after getting the basics.
• Venture capitalists are more open about sharing information than people think.
• The module covers companies benefiting from venture capital, how it works, connecting with VCs, pitching to investors, and navigating the start-up funding landscape.
• It introduces venture capital and gives a general overview.
• After completing this module, students should be familiar with venture capital, venture capitalists, and the entire venture capital process.

Understanding Venture Capital and Venture Capitalist

• Venture capital refers to equity and equity-linked financing for ventures, from seed and start-up ventures to bridge financing.
• Diverse investors provide venture capital with diverse objectives.
• Understanding the differences among venture investor sources is crucial.
• Two types of investors make up the venture capital markets like venture capital funds and wealthy individuals, called business angels.
• It is a specific investment type for a unique company.
• Venture capital-backed companies are expected to grow fast and are sold after five or seven years through acquisition or an IPO.
• Venture capital is a high-risk, high-return asset class.
• Not all investors want to be involved with venture capital due to the risk level.

Characteristics of a VC:

• A VC is a financial intermediary, using investors' capital to invest directly in portfolio companies.
• A VC invests only in private companies.
• A VC takes an active role in monitoring and helping its portfolio companies.
• A VC's primary goal is to maximize financial return by exiting investments through a sale or IPO.
• A VC invests to fund the internal growth of companies.

Advantages of Venture Capital

• A large amount of capital can be raised.
• Help managing risk.
• Monthly payments not required.
• Personal assets don't need to be pledged.
• Experienced leadership & advice available.
• Networking and collaboration opportunities with industry experts & other start-ups.
• Assistance with hiring & team-building.
• Increased publicity & exposure.
• Help raising subsequent funding rounds.

Disadvantages of Venture Capital

• The founder's ownership is reduced.
• Finding investors can distract founders.
• Funding is relatively scarce and difficult to obtain.
• The overall cost of financing is expensive.
• Formal reporting structures & boards of directors are required.
• Extensive due diligence needed.
• The business is expected to scale & grow rapidly.
• Funds are released on a performance schedule.
• Losing the business for the founder is possible.
• Leverage in negotiations is rare for start-ups.

Venture Capitalist

• These are people who invest money in start-up businesses and companies.
• Venture capitalists are professional investors who give start-up companies money in exchange for equity.
• They provide liquid capital and support during the company's growth.
• They bring together large sums of money for an investment fund, then invest in hand-picked companies.
• Venture capitalists invest in companies with excellent odds of being successful venture-quality companies.
• They support companies in their portfolio with mentorship, board members, and strong management.
• Venture capital firms tend to specialize by focusing on a specific stage of company and one or two industries like medical devices or clean energy.
• They need to understand the chosen industry and technologies inside and out before investing.

Venture Capitalist Activities:

• Investing begins with prospecting for new opportunities through signing a contract.
• After investment, VCs work with the company through board meetings, recruiting, and advice.
• VCs plan exit strategies carefully, usually with investment bankers, since they have a contractual obligation to return capital to their investors.

Focusing on Different Stages:

• Stage 1: VC may invest in seed stage companies, those with no/little revenue.
• Stage 2: VC companies have $5 million to $50 million in revenue.
• Stage 3: VC may fund mergers and acquisition of larger companies.

Types of Venture Capital Funding:

• Seed capital: For start-ups without a product or organized company.
• Start-up capital: the company has a sample product with at least one principal working full-time.
• Early-stage capital: The company has been around for two to three years, has a management team, and has increasing sales.
• Expansion capital: The company is well-established and wants to take its business to the next level.
• Late-stage capital: The company achieved impressive sales and revenue and has a second level of management in place.
• Bridge financing: Looking for a partner to find a merger or acquisition opportunity, or attract public financing through a stock offering. Venture capitalists possess expertise in their chosen industries, understanding it completely.
• Venture capitalist look for innovative new companies and products.
• Most venture capitalists look for companies that:
  • Have a product or have made progress toward a product
  • Have a strong team
  • Connected with its target customer and understands its market
• Seed stage investors are more accepting of risk.

The VC Fund Lifecycle:

• Venture capital funds run on a predictable, ten-year cycle.
• In Year 1, investors raise raising a fund.
• In Years 2-9. VCs find companies to add to their portfolios, introducing founders if needed.
• While the company is invested, the VC manages it by joining the board.
• At the end of the fund's lifespan, the VC liquidates the companies through M&As or IPOs.
• All the companies in the portfolio is sold, the money is returned to the investors and the VC funds closes.

Choosing the Venture Capital Pathway

• Companies that benefit most from VC are those with disruptive technology or products that aim to grow very large very quickly.
• Venture capital may not be suitable for companies with tried-and-true products or services.
• Venture capital may not be right for the company owner who like to retain primary control.

Alternatives to Venture Capital

• Companies can grow as small-to-midsize businesses (SMBs) needing less capital, grow more slowly, and remain more stable if they do not wish to pursue ventures.
• Small businesses can raise money through bank loans, crowdfunding, friends and family, grants, and franchising.

Securing Venture Capital:

• Plan your business to remove hurdles and increase the possibility of success by: targeting a huge problem with a huge market, and showing progress toward revenue.

To secure Venture Capital:

• Start by thinking about the end result to give the company direction.
• Become visible to increase the likelihood of getting funded by meeting the funders.
• Develop the deal and the company.

Polishing Your Company for Investors:

• Investors prefer market research they can follow.
• Regularly revise business plan and model regularly to reflect new information.
• List relationships that may be strategic/mentorship.
• Plan out employee needs in the near future.

Putting Together the Deal:

• The deal is the amount of money needed and the percentage of the company that the investor will get in return for capital.
• Lay out company's future plans to determine how many times've capital must be rased.
• Identify risks/milestones to determine the price of shares, and prove traction.
• Calculate the valuation of the company, and understand the risk.
• Collect due diligence materials to help speed up the funding timeline.

Making a Pitch:

• In a pitch, present company to investors.
• You tell investors what you do, discuss how much money can be made, how to gain access to customers, milestones involved in development, and financials before discussing the investment opportunity.

Explore the defining characteristics of venture capital backed firms. This lesson covers investor classes in venture capital, the importance of understanding investor objectives, and the stages where venture capital is used. Also covered are typical Venture Capital firm characteristics.