What is venture capital?
Venture capitalists take equity in your business in exchange for big financing. These investors typically only do multi-million dollar deals and expect a big return on investment. They take the risk with the hopes that you and your business will be able to grow into a significantly high return in the future. In exchange for the investment, you give them a piece of your company instead of paying them back in an organized fashion, and you are promising that you will do whatever it takes to scale the business so that they are rewarded for the risk they took on you (usually looking for 100X).
This is a very important filter. Can you turn that investment into 100X its value? Here’s some simple math.
Someone gives you $100,000 in exchange for 20% of your company. They want 100X because they’re assuming another 20 of their investments will fail and they’re sticking you with the bill. That means they’re looking for $10,000,000 when you finally sell your company or go public. Because they own 20%, or 1/5th, of your company, this means you need to build a company that achieves at least a $50M valuation. Is this what you want? Do you have what it takes?
In general, venture firms usually have:
Very specific investment strategies
Specific range of check sizes based on the size of their fund
Typically later stage than angels
Looking for a reason to say “no”
Will often take a board seat
Venture capital firms like Sequoia Capital and startup incubators like YCombinator act as companies that invest money in startups they believe have potential and usually also provide guidance on how to maximize the company or organization’s day-to-day operations to expand it. They do this usually in exchange for stock when a startup goes public or a share of ownership that will become more valuable as a company grows. Each firm has its own investment strategies and sometimes will focus on specific industries like retail or healthcare startups. They usually will invest in startups that have solid foundations and have made its first sales.
The venture capital firm, Sequoia Capital, invested $60 million dollars in WhatsApp for 18% of ownership in what was a relatively small startup at the time. About 3 years later, WhatsApp was acquired by Facebook for $3 billion dollars. That means that Sequoia Capital earned 50x their original investment in WhatsApp!
What are some advantages for venture capital?
They business expertise in the areas in which they invest and will be involved in running the business.
What are some disadvantages for venture capital?
They typically work and propose negotiated terms that they set, which may not be ideal for you and your business goals.