A Guide of Venture Capital for the Lay person

A Guide of Venture Capital for the Lay person

Finance isn't a word that many individuals use to describe what they do. It basically consists of filling in spreadsheets with little more than reasonable estimates and then pasting those predictions into presentations. If you wish to make finance interesting, then lets talk about Venture Capital (VC).

VENTURE CAPITAL

The backing of new, fast-growing firms is known as venture capital or startup money. This does not imply that you will be able to obtain venture funding for your closet manufacturing franchise.

With each investment, venture capitalists are hoping for a return of at least 100% per year, with most investments totalling $1 million or more. This means that a typical small firm intending to open a second location or purchase equipment will not be suitable for VC funding.

That's great, because VCs demand a lot of equity, so you're better off avoiding them unless your company generates hundreds of millions of dollars in revenue.

Although specialist VCs exist, most VCs will invest in technology (including software, web enterprises, and traditional technology) and medical device/biotechnology ventures. This is where the firm, as well as the market it serves, is seeing rapid expansion.

TYPES OF FUNDING

Here are the stages you'll go through in the startup funding life cycle if you're constructing the next big Software as a Service (SaaS) solution that will revolutionise the millennial dog sitter scheduling sector.

Family and friends

It always starts with friends and family unless you are independently wealthy when you start working on your startup. That uncle who struck it rich with oil well investments, or your college roommate who bought Bitcoin in 2010.

Your closest friends and family members will be the most sympathetic to your plight. They may see the 'investment opportunity' as a method to help you rather than a way to gain money, which may sound harsh. Every other source on this list is attempting to profit.

From Banks

Banks Support for the Small Business Administration (SBA), but the bank loans are typically too risky for startups.

You could earn $150,000 in working capital from bank, if you have perfect forecasted financials, a long history of industry experience, clients lined up, and a professional-looking business plan. As long as if you don't mind the bank taking out a mortgage on your home.

ANGEL INVESTORS

Angel Investors are individuals who invest in small businesses. Angel investors are the professional version of friends and family, and they're called that because they swoop in and save failing firms with angel-like investments.

Angel Investors are the ones you see on the show Shark Tank. They usually have a lot of company experience and can also provide consultancy services.

Angel investors can provide both capital (cash in return for equity in the company) and venture loans. Rates on venture debt are often in the teens to high teens, and they frequently include a conversion mechanism that allows the investor to convert their investment to equity.

EQUITY FUNDING

Funds that invest in private equity

Private equity funds, which include venture capital funds, are a subset of the larger universe of private equity funds. Private equity funds are formed when two or more people pool their money to invest in non-public (as opposed to public) firms or other alternative ventures.

The final step is venture money. You might attract the attention of a venture capital fund once you have a well-established product and are witnessing considerable growth.

WORKING OF VCs

Here are the five most important factors that VCs consider while making a decision.

1. Management

The most crucial factor in a VC review is management. There aren't many successful startup owners who have never tried to establish a firm before, have no industry knowledge, and aren't willing to spend 100-hour weeks.

VCs want imaginative management teams that can get the job done and delegate when necessary.

2. Market size and share of the market

People spends hours constructing financial models and pondering the efficacy of business concepts when they think for their startup. Every entrepreneur spent far more time than anticipated walking around random sporting goods stores taking notes on end caps in order to assess addressable markets.

It is impossible for a business to become gigantic if it does not have a large addressable market.

3. The product's competitive advantage

You still need a fantastic product, even if you have a terrific management team and a large market to sell to. VCs will not invest in anything that can be classified as generic. They prefer the exclusive. This is the kind of stuff venture capitalists are looking for. That product saves money for all of its users and has a demonstrable environmental benefit.

4. Financial Estimates

Given that venture capital is a financial company, you'd think the most significant thing to VCs would be financial projections. In truth, they take financial estimates and forecasted company measures with a grain of salt. Management estimates are usually discounted by at least 15%, and in some cases even more.

In general, VCs will calculate the addressable market, make an educated guess at what percentage of that market your firm can capture, and then slap some cost assumptions on top of that to produce financial projections. These figures will almost never be accurate. It's more important to gain a feel of what's possible than to be precise.

5. Assessment

Because valuation is based on financial assumptions, it is viewed with the same mistrust. Valuation is used to determine what the business's potential rate of return is and to argue what percentage of the company's equity the investment should receive.

VENTURE FINANCING INCLUDE STEPS LIKE

Consider the stages your company will go through as a result of venture capital funding.

Concept

The concept phase is when you come up with an idea for a product and then get to work on it. You write a business strategy, study business ownership and startup bookkeeping, contact vendors, and possibly hire a few staff.

Seed

The seed stage is when your product will be released. If you have a track record of successful firms, venture capital may be able to help you fund the seed stage. Otherwise, you'll have to rely on one of the above-mentioned resources.

Customers can fund your product as an alternative source of capital, which became popular when Eric Reis' book The Lean Startup was published in 2011. Build a minimum viable product (MVP) and sell it to interested clients, then expand into stronger iterations as your business grows. Startups that can expand in this manner have a leg up on the competition when it comes to raising outside money.

Venture Capital (VC)

To raise money for expansion, you'll most likely go through numerous venture capital's . Each one will have its own set of benchmarks, values, and, more than likely, investors. In terms of equity, each subsequent round gives new investors less bang for their cash.

Initial Public Offering (IPO)

The initial public offering (IPO) is the ultimate stage and goal of most original venture capital investments (IPO). You'll hire an investment bank to underwrite the offering, then embark on a potentially global roadshow to promote your firm to the first investors who will buy stock on the open market.

Most private investors, including any angels you found, and VC funds will sell their shares at this point. Founders will frequently sell shares to pay the tax obligation on their earnings when the company has grown to a certain size.