Venture capitalists work across a range of industries and act as catalysts for innovation. Most VC firms will identify promising businesses and support them with both funding and guidance. VC capital helps startups and forward-leaning businesses scale and launch successful new companies.
In addition to providing capital, VC firms are tightly focused on assisting with front-end diligence, research, networking, and deal-making. The experience behind VC firms makes them the ideal mentor for new businesses, delivering benefits outside of financial support alone.
How can a VC firm deliver value to a new startup, though, and how does the VC funding process work?
How Does VC Funding Work?
Capturing the interest of a VC firm isn’t easy — fewer than 1 in 100 startups that seek VC funding achieve success. The first and most important step in gaining VC funding is creating a list of venture capitalists that operate in the same industry as your startup or business. Sites such as Crunchbase or CB insights provide detailed information regarding the activity of most VC firms.
Once you’ve identified relevant VC firms, it’s important to assess your own network connections and determine whether your personal connections place you in a position in which you are able to approach them. Capturing an introduction to a VC firm through a mutual connection is a major advantage.
If you’re able to capture the interest of a VC firm, your business will likely gain a show of interest. Most VC firms will require a comprehensive pitch deck which, if successful, will result in the coordination of a meeting in which a partner at the VC firm question will discuss the potential of collaboration and funding.
Businesses that successfully negotiate an agreement with a VC firm will then be offered a term sheet, which functions as a non-binding agreement that establishes a relationship while the due diligence stage is performed. If your business passes a due diligence assessment, a VC firm will offer funding — the entire process typically takes three to six months from initial content to funding.
How do VC Firms Make Money?
Most venture capital firms monetize by creating profit from carried interest and management fees. In most cases, management fees are calculated as a percentage of the capital that a VC firm invests and commonly ranges between 1 and 3 percent.
Carried interest is another important method through which VC firms monetize, and allows VC firms to access a percentage of profit. Carried interest typically ranges between 20 and 25 percent, and is realized when the business that the VC firm invests in is acquired or successfully executes an IPO that allows the VC firm to exit. This process can take between four and seven years depending on the performance of the business.
What Kind of Value Can a VC Firm Deliver to Your Business?
Venture capitalists take a hands-on role when investing in a business. This provides businesses with key guidance, critical infrastructure, and investment opportunities that may not have been accessible without VC investment.
The partners of a VC firm investing in a business will typically want to sit on the board, which means VC partners will maintain an active presence in board meetings. This allows businesses to leverage the extensive experience that VC partners possess. Strong VC partners will assist with operational matters and management coaching.
The large size and extensive networks held by major VC firms present unique and lucrative networking opportunities to businesses, allowing them to work with a wide range of specialists that can assist with every element of the business process, from marketing to scaling, or sales.
VC firms can also assist with headhunting — a strong VC firm will assist your business by finding, hiring, and retaining highly talented key personnel.
Make Sure You’re Working with the Right VC Firm
Working with a VC firm can provide your business with a significant amount of value, but it’s essential that you work with the right VC firm to maximize the productivity of your partnership. There are a number of key identifiers that can be used to isolate the right VC firm for your business.
If a VC firm hasn’t invested in a business for more than six months, it’s probable that the firm is undergoing a fundraising stage and won’t be able to invest in your business until the fundraising process is concluded.
When considering a VC firm, it’s important to ask the VC partners how they prefer to work with portfolio companies. Ultimately, VC firms should provide far more than funding. Venture capitalist Andrew Hamilton emphasizes the importance of delivering mentorship and guidance to new startups. As a serial VC entrepreneur, Hamilton has led multiple businesses to success and is the CEO behind trading platforms such as Rubix.
“As a venture capitalist, one of the most important things I can give to a platform that I invest in is my experience — without the right guidance, early-stage startups can’t succeed even with several successful funding rounds”
The venture capital ecosystem provides innovative businesses with many advantages such as strategic insight, mentorship, networking opportunities, and connections to highly talented key personnel. Before engaging with a VC firm, ensure that you’re connecting with a firm that is right for your business. The right VC relationship will ensure the long-term success of your business and a profitable long-term venture for all parties.