Venture capital funding is primarily used by start-ups when they reach a stage where they are ready to think about growth. A more detailed definition of venture capital can be found in the short video attachment to this post.
With an eye on future growth, there are certain things that most venture capitalists will look for when selecting start-ups to provide funding for. As a board member and investment advisor for a Fintech start-up, it is important that Thibaut de Roux understands what these criteria are.
Venture capitalists are looking into the future and determining how likely it is that they will be able to make a profit at the time they exit the investment, rather than through ongoing earnings from return on operational profitability. This means that the things they are looking for can be quite different to those that other types of investors seek.
You can learn more about some of the other types of funding available to start-ups in the embedded PDF.
As the main profit made by venture capitalists occurs at the point they exit the investment, the time horizon for investing is naturally relatively short. Most venture capitalists will be seeking investments that they believe will mature to a profitable exit point within the next three to seven years on average.
The time horizon may be towards the longer end of the scale in cases where the venture capitalist is investing in a seed stage or very early stage business, while investments in more established companies will have a shorter time horizon.
The specific fund that the capital is coming from may also determine the potential time horizon. A fund with only a few years of tenure left, for example, will be looking for investments that fit that timeline.
Investing in People
Venture capital investment is by its nature fairly hands-on. The investor receives an equity stake in the company in exchange for the investment, and therefore has a say in how the business moves forward. For the investment business this can be incredibly useful, as the venture capitalist may bring expert knowledge and additional experience to the table.
For the venture capitalist, this means that they are more likely to choose investments where the business is owned or managed by individuals who have a similar character and outlook to themselves. Without the right management team, even some of the best ideas in the world will not make it off the ground, so venture capitalists are often looking for the right people just as much as the right business.
On average, less than 1% of companies in the United States receive funding from venture capitalists. With the funding being so rare, it is essential to have an innovative idea that makes the start-up stand out from the crowd to attract the interest of venture capitalists.
Ideas need to be new and original but also thoroughly researched and well-presented if they are ever going to catch the eye of this elusive group of investors. This includes a detailed overview of not only the strengths of the idea but also its potential weaknesses, clarity on why it is required in the first place, and what current alternatives exist.
As shown above, venture capitalists are all about the exit strategy, therefore exit options should be well documented in a funding proposal. This can include details of other potential investors who may want to become involved once the business has developed far enough, or what the prospects of an Initial Public Offering will be like.
The infographic attachment looks at some of the top venture capital funding deals completed in the second quarter of 2019.