Venture capital (VC) is financial capital raised to create a venture capital fund. The VC fund then gets invested into exceptionally high growth potential startup businesses. The structure of the deal can vary significantly with hybrid securities like a convertible note or preference shares regularly used.
In simplistic terms, the VC is typically looking for equity in the business and the venture capital fund makes its money from the capital gain of the equity value when the business is sold.
Venture capital is typically provided as growth funding for the expansion stage of a business and would typically come after early seed funding or angel investor funding rounds.
Venture Capitalists (VC’s) are very selective in the investments they make and typically make investments of $1,000,000+ in return for ownership and influence in the business. In Australia, VC’s tend invest between $1,000,000 and $5,000,000 (but may be slightly lower or significantly higher) in a single business and VC’s would typically take 10-40% ownership in the business.
Only extremely high growth potential startups will gain venture capital. It’s typical for VCs to invest in only 1 out of every 100 opportunities they see. In addition to just providing financial capital, the VCs themselves will have deep knowledge and connections within their industry and will often take on advisory and directorship positions within the startups they invest in.
Early stage businesses (even in a growth/expansion stage) are still very high risk and many will fail entirely or fail to provide a valuable exit. Because of this, Venture Capitalists look for exceptional investment opportunities with extremely high growth potential in order to balance out their failed investments and provide the overall financial returns needed for the fund. Like Angel investors, Venture Capitalists require an exit, a liquidity event where they can sell their equity (or other security type) in the business and achieve a capital gain of typically 5-10 times return (or higher) on their initial investment. VCs typically look for a 3-7 year timeframe to exit.
Most VCs operate in innovative technology industries like Internet, IT, Software, Cleantech and Biotech which are likely to produce very high growth businesses, but a VC may operate in any industry which provides sufficient opportunities. Each venture capital fund has a detailed criteria list that determines what opportunities they can and will invest in. These are likely to include:
Review your startup business closely: Is it an extremely high growth potential startup, does it have a proven business model, is now looking for expansion funding in order to scale, looking to raise capital in the range of $1,000,000+, with a likely exit event 3-7 years providing returns of 5-10+ times? If you don’t match these broad criteria, venture capital probably isn’t suitable for your startup. Read more other business funding options.
However, if your business fits within the broad criteria, venture capital might well be a viable funding source.
If you’re looking for VC funding, there are two key things you need to do:
1. Get Educated
2. Get Connected
Raising venture capital is a complex exercise. VC’s are very selective. Months before approaching any investors or capital raising advisors you should begin educating yourself on the capital raising process, systemising processes, reviewing and de-risking your startup, building out a more complete management team and generally getting a detailed education about raising venture capital. For the entrepreneur seeking venture capital, even if using an advisor, being highly educated about venture capital and the capital raising process is vital.
iPitch.com.au is in the process of creating educational material on this topic and establishing partnerships with existing credible educators. Until we update this article, contact iPitch directly for recommendations on education sources for venture capital raising.
Obviously you need to know who the venture capitalists are and then determine which ones make investments in your type of startup. Your best chances of approaching a VC successfully is through a warm introduction from a trusted connection of the VC.
Another good idea is to introduce yourself and your business to a VC well before you decide you need to raise. This helps to build a closer working relationship. Ideally an entrepreneur should make forecasts to a VC in these early meetings and then show the results in future meetings to build credibility.
Experienced corporate advisors with a successful track record in your industry are often the best method to lead the capital raising for your business. Not only do they bring significant knowledge, experience and connections they also allow the management team to focus on running the business throughout the capital raising process which might be a lengthy time period.
If you are looking to engage a corporate advisor, don’t hesitate to contact iPitch directly to get our opinion on a corporate advisor that has the capabilities and experience your situation requires.