January 19, 2021

What is Venture Capital and how does it work

This article was originally written by YES!Delft. You can find more information on YES!Delft here. If you want to see the original article, click here.

What is Venture Capital and how does it work?

Raising money is not easy. In fact, having a good product, a working prototype or a bold business idea is often not enough to make finances work. Read how to win the game in this blog post about venture capital by Riccardo Covelli from YES!Delft.

In the world of startups, success derives directly from the company's attractiveness to investors. In fact, having a good product, a working prototype or a bold business idea is often not enough to make finances work.

Any seasoned entrepreneur would tell you that “Cash is King”.

It couldn’t be more true. But how can you keep the cash flowing for developing your product and organisation without really making revenue?

There are several ways to secure a good monetary base to finance your ideas: among these, Venture Capital (VC) stands out. Let's find out what it is, what the venture capitalist is looking for, and what are the secrets to convince him or her to believe in your startup.

This blog post is the first of a series dedicated to venture capital, created thanks to the fundamental contribution of David Cerda Salzmann from FORWARD.one, a VC firm specialized in investing in game-changing hardware innovations.

Here are the questions we'll try to answer here:

  • What is venture capital?
  • Who's the venture capitalist?
  • When does the venture capitalist come into play?
  • How to get in touch with a venture capitalist?


What is venture capital (VC)?

Let’s start with a super quick video by Forbes:

On the Investopedia website, we read that venture capital is “a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.”

It is usually said that venture capital is the riskiest type of investment an investor can make. In fact, from the investor's point of view, the success of a startup must be so great as to cover the losses of the other startups in which he has invested and which have not worked.

And there’s a lot of money on the plate: according to Crunchbase, an astounding $1.5 trillion was invested in venture capital deals over the last decade, globally. In 2019 alone, nearly $300 billion was invested in nearly 32,800 deals across various stages, representing the most deals secured of any year in history.

Image via crunchbase

Who’s the venture capitalist?

If you think the venture capitalist is a guy with a Tesla who shows up at a pool party with a briefcase full of money, well... you're almost there.

His or her profile looks something like this:

  • A technician with an affinity for Business or Finance
  • Financial professional with an interest in innovation and technology
  • With a solid knowledge of several sectors
  • Selecting and funding promising startups
  • In inherently unpredictable, high-risk business

At this point, it’s necessary to make a distinction between two different types of venture capitalists: Corporate and Independent.

Corporate VCs

  • They are part of one or a collaboration of several large companies
  • They often serve strategic interests over returns
  • They open many doors within the company; dependence can deter others

Independent VCs

  • They are a broad group of investors (private / companies)
  • Investors want financial returns, information, and connections
  • They are interesting because of independent validation and knowledge

When does the VC come into play?

Let’s talk about timing.

Each startup faces different stages of life and often sees its timeline as a perpetually growing graph. The reality is quite different: as you can see in this graph, when the product is launched the company finds itself in deep economic loss (at the end of the so called "Valley of Death"). This is where the fundamental contribution of the venture capitalist comes into play. They are the ones to turn to when you need more than grants, friends and family can provide, while banks will not fund you yet. But in addition, a VC will be committed to support you along the journey with more than financial means only: they can bring substantial value in terms of experience, know-how and network.


Remember:

the journey never ends (and revenues are coming late)

A couple of things you should keep in mind:

  • having a prototype ready does not mean you are generating revenue
  • generating income does not mean you are making a profit
  • making a profit does not mean you are growing a company

So please keep in mind: having a working prototype ready is only the beginning of the journey through the Valley of Death!

How to get in touch with a venture capitalist

Now that you understand what venture capital is and what are the best times to get it involved in your company, let's find out how to get in touch.

First meeting

It always starts from here. Visit the website, find a contact and make an appointment. It will be important to show a teaser of your product (or service), in the way you prefer (video, pdf presentation, etc.).

Criteria fit

If you haven't found out before, in the first appointment you will have to understand what are the criteria of venture capital in choosing which companies to invest in. For example, FORWARD.one invests in hardware solutions for the B2B market: do not approach them with a B2C software proposition!

Check the financials

It's time to take a look at the economic sustainability of your company. Together with the venture capitalist, you will analyze your Business Plan, growth forecasts, numbers of your reference market, etc.


Meet the family

To become part of the family, the investor must know the members. This is why it is essential that he meets your team (we will talk more about this in the next blog post), visit the production sites, and meet the stakeholders.


Paperwork research

It is time to get a more specific idea of the technology in use, the technical specifications of the product, intellectual property and everything that is useful for a qualitative evaluation such as markets and launching / potential customers.


Deal?

You reached the end of the process. If you have convinced the investor, your deal is ready to be signed and you are ready to enter the Valley of Death with a fundamental dose of food supplies.

What’s next?

Raising venture capital is not easy.


You need to have a good idea, team, and traction to get an investor's attention in a very crowded market; and you also need to know the right type of venture capital to ask for. So get ready for the next article in this blog post series, where we will talk about the importance of the team.

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