It’s obvious that every start-up requires capital money which can be used either to get off the ground or ramp up growth.
Knowing the right time and opportunity to seek outside investment from the venture capitalists can indeed be a big decision for the start-ups.
It has been found in a survey that not too many start-ups know enough about how the VC investor system works. Here are six things every start-up entrepreneur should be aware about venture capitalists.
Proper Understanding of VCs and How a VC Differs From an Angel Investor
In its early days, if a start-up managed to raise any money, it used to be from people who know the entrepreneurs personally.
These people who were either friends or family would have been more than happy to get a return on their investment eventually. However, there are chances that they are not investing solely just to make a profit.
Moving up a notch, angels and VCs want a return on their investment. Angel investors have an interest in a particular city or industry, and because of that, they are driven to take a chance on companies which are closer to home.
Understanding the Process by which, the VCs make their Money
VCs make their money by helping a young company grow and gain in the overall value and then cashing in a few years later when the company is sold or goes public.
They usually expect a huge return on their investment -- 2 to 10 times of what they put in or even more.
How VC Funds Work
A VC fund is a pot of money that is being raised from wealthy individuals or institutions locked in place and then put into ‘fundable’ companies.
Each fund contains a set amount of money so that the investors can calculate the IRR (investment rate of return) on the amount. No new money is added to an individual pot. As a result, a venture capitalist will often have several active funds in its portfolio.
Understanding that you are Giving up Some Control
When the VC signs the first cheque, the investor is given shares in the concerned company in return -- usually preferred shares, which among other things will help the investor reduce their investment risk.
If there are several investors, the one who wrote the biggest cheque is the lead. The lead’s lawyer negotiates the terms, and the secondary investors follow along.
The terms are often overlooked by entrepreneurs who commonly focus more on getting the highest valuation possible.
Understanding that the VC investor will be your partner
Having a VC partner on board offers an incredible opportunity to tap into the skills and network of an individual who moves in business circles outside your own.
Use your partner well, and you will be on the road to growth. Because so much is at stake, it is crucial to pay attention to who that person is.
The choice of a VC partner is kind of like hiring an employee, except for the fact that you cannot fire them. Whether it works depends to some extent on whether you click.
So, it is crucial that you choose with whom you get along and with whom you can build a safe and trusting relationship.