Venture Capitalists are both very popular and very unpopular. They get to be popular because they have money to invest and are looking to do so. They are unpopular because they often ask for terms that the Owners do not like nor do they want to agree to.
But let us start at the beginning. A Venture Capitalist (VC) generally works for a VC Firm that has one or more funds. These funds are raised prior to their usage and have some notion of what kind of companies that will be invested in and when the investment will occur. I want the reader to take two points from this. First, a VC will not be a generalist. They have restrictions on the kinds of firms that they can invest in. This can be either by geography, stage of company, industry or any combination of all of these. Second, there is a time frame in effect. The fund investors expect to be able to get a return (or not) within a specific window of time. It would be rare for anyone to have a fund that was open for a very long time. The idea would be to complete the investment, return the proceeds to the investors and move on to the next.
There is also the notion of an Investment Committee. This will be typical of larger, more professional organizations in investing. In this case, a VC will bring the idea of the investment to the Investment Committee, who will ask a number of questions and approve, change or dissaprove the deal. In general, the individual VC will not make a decision.
I expect to cover Valuation as a topic next week, but as I have said that is an issue. Generally, the VC is going to want the Owner to lose control of his firm to the new investors. They want to have a level of control over what they consider (in most cases) a less educated and experienced professional. But you can also expect these new investors to want to have a number of Board of Directors seats and to be compensated for being on the Board. Management can expect to report out regularly (often monthly) to the Board with metrics that show the company progress against the plan. These can often be problematic as most Entrepreneurs are inherently optimistic. Thus most plans fall behind and increasing pressure is asserted to meet the original deadline.
But the reality is that Venture Capitalists are all about the Exit or the Liquidity Event. This is when the company makes the shares that the VC holds turn into cash in some form. This is generally through a buy-out by a bigger firm or the company entering the Public Markets through an Initial Public Offering. This Liquidity Event is supposed to put profits from the investment back into the Venture Fund, so that when the Fund expires that the original investors make a profit. Along the way, the VC takes a percentage of the fund to run the VC firm and pay the employees.
Well that is the basics of the Venture Capital World. Next time, we talk about Valuation. Have a great day!
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