This sort of investment is the key behind many of Silicon Valleys’ innovative start ups. It also has one of the most attractive returns for investors. As a result, the term “venture capitalist” became synonymous with wealth, ambition and success.
Since this is a term that attracts a lot of dreamers and ambitious young investors we decided to create a quick guide. Here is your key to understanding venture capital and what it can be in reality.
Step 1: understanding venture capital and what it is
Are you still understanding venture capital or still starting? We’ll begin with the basics, this term, also called startup capital, is money that investors put into young and fast growing businesses. Putting it simply, this is seed capital that entrepreneurs use to do research and development of innovative and disrupting products.
But don’t take us wrong when we say they aid in the growth of small and young companies. Venture capitalists don’t do anything out of the greatness of their heart, but actually bet on investments that can earn up to 100% a year.
Anyone who knows safe investment options, such as high yield savings account, knows that they aren’t really high. A high yield saving option might yield about 1%, if you find a good option. So the returns from venture capital can be insane, but so is the risk.
We’ll mention it in more detail below, but the numbers of successful businesses and the ones that fail are really similar at the start. So a single wrong choice can put a lot of money at once.
Step 2: understanding venture capital and if you need it
Are you an entrepreneur understanding venture capital and when to look for it? Here we go: this type of capital is an investment that must yield some of the highest returns in the world of finances to actually be worth it.
Anyone who tries to get money from angel investors or other type of VCs knows that they can be extremely hard to reach. Even when you actually manage to get in touch with them, the chances of getting an investment are low.
When they decide to invest, they must base this on some key factors, such as:
- Solid management: preferably, people who worked on previous projects that brought high returns;
- Market size: starting in a market that is growing fast is a great idea to attract capital;
- Risk assessment: a VC always checks which type of risks they’ll be subject to before starting. Even if it’s a risky investment, the gains must outweigh the chances of everything going wrong to be worth it.
This means that VC is rarely a possible choice for green managers or entrepreneurs looking for money to being their ventures. Even if this type of investment is famous for enhancing startups, the investors usually look for people that are familiar with their market.
Understanding venture capital and how it works
The process we’ll explain below is important for both entrepreneurs who want to get funds and venture capitalists that are looking for a good investment choice. Some processes might diverge from this, but it is basically how you prepare a business to apply for VC and how most venture capitalists will analyze your project. So pay attention to every step!
1. Concept and business project
When you’re understanding venture capital you’ll see that the project is a very important first step. It is, after all, the soul of the business that shows its uniqueness and main steps for growth.
But pay attention before you start with actual work while you’re planning. Most start ups already have a few employees and are starting tests or production when they start applying for new capital.
A solid business plan includes financial plans, development stages for your product and other details. Anyone who is still new to this might want to study business developments before they dive into the VC world.
2. Seed
This is the launch stage of your product or project. Usually you won’t be able to get any venture capital at this stage, especially for managers that don’t have a long history in the area. Loans and other types of funds can help to grow a business and see a project before it starts producing results.
Anyone looking for venture capital might choose to use a minimum viable product (MVP) for its beginning. Once you sell this to interested buyers and consumers you can start investing in better versions.
With the MVPs success, investors will begin to understand a business’ potential for growth and profit.
3. Venture capital
This is where business owners start looking for angels or venture capitalists to evaluate their projects and possibly invest. Here we come with a warning: most businesses don’t get close to finding their dream investment since this is an incredibly risky area. VC isn’t just about innovative ideas, but has to consider the odds of success and failure. If something makes a business even slightly deemed for failure, it won’t be able to get the support it needs.
If you’re someone who has a good deal of cash to invest and thought about choosing a business to finance, be careful. As we said before, the chances that a business will have great success are often equal to the chances of failure. Check as much information as possible before that.
4. Initial public offering (IPO)
The business is booming, everything is going well and you’re ready to reach new heights, as well as your investors. That’s when you reach the final step on the journey with an initial public offering. A bank must craft an IPO to get the company started on the financial market, now you must look for new investments to buy those initial stocks.
This is also when a venture capitalist gets the return for their investment, by selling their shares and enjoying the growth of the business.
Who can invest in venture capital?
There isn’t a set origin story for these startup heroes called venture capitalists. Often, these shoes are filled by experienced investors who have a high tolerance for risk and decide to look for higher returns. Successful entrepreneurs also can get started in VC if they’re confident enough of their market understanding and can spot a great opportunity.
To get started in venture capital you must not only have assets to invest, but also great knowledge of the financial market. Understanding trends and everything related to the finance industry helps to make safer and better options.
Another important information: venture capitalists aren’t always investing their own money. Sometimes, they’re financial advisors for big firms working with third party assets. Which means that their main asset is knowledge itself. Venture capital firms look for these highly specialized professionals to get their returns.
Do you need a license to work with venture capital?
You don’t really need a license or even a college degree to get started in venture capital. However, as we said in the previous topic, knowledge is essential. That’s why many professionals in the field have some prior experience or study in finances.
Actually, over 50% of VCs have an MBA from highly prestigious schools, such as Harvard or Stanford. Having previous experience in investment firms, technology firms or even a lot of startups is a plus as well.
Venture capital is an area that requires a lot of experience. It certainly isn’t recommended for beginners in the investment world who might not be aware of its finest subtleties.
Understanding venture capital in startups
Thanks to many news pieces showing the part that understanding venture capital played in key companies of the computer industries, we often think that this type of investment is single handedly responsible for startup’s success. That isn’t exactly the case.
Actually, the greatest funders of innovation and new companies are governments and big companies. Once the seed has been planted, venture capitalists tend to wait until the sales actually started to put their money into the project.
A Harvard Business Review’s assessment expects that over 80% of the money invested by VC actually goes into infrastructure. That means that it helps to grow the business, not actually get it started.
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