What is venture capital? Is it the new Wall Street? If so, where do you park your car? And what’s a good venture capitalist like compared to a bad one? If not, why are so many people—and their children—thinking of starting their own companies? Because at its very best, venture capital is an abominable, wonderful thing. But at its worst, it can be very wrong.
This blog post is partly a response to the recent trend in media coverage of venture capital and its impact on young startups. I believe this trend is misguided and sets venture capitalists up for ridicule. It’s easy to caricature VCs as rich guys who take advantage of young entrepreneurs looking to make their mark.
But that’s only part of the story. If you look deeper, you’ll see that there are plenty of positive reasons why every VC should fear being shouted down by protesters outside his office window (assuming he has one). Let’s unpack why that might be …
What is venture capital?
Venture capital is a type of early stage funding that is intended to help startups grow by funding their initial operations. Unlike with early stage funding, which is generally provided by angels and venture capitalists, venture capital is provided by investment banks. Because it is meant to be used as a stepping stone to growth, it is usually highly dillutive to the company receiving it.
At the same time, it can provide an incredible boost to the startup if used correctly.
The problem with venture capital
As I mentioned above, the vast majority of venture capital goes to firms that are already well-established. This means that many startups get very little assistance. This means that many startups get very little assistance. In fact, the vast majority of venture capital is used by established companies.
This is understandable considering the return on investment. However, there are many situations where venture capital is essentially a no-brainer. Here are a few examples: When a company is at a disadvantage because of a regulatory or environmental issue.
Regulatory tardiness is a huge problem for startups. Environmental issues are a potential headache for all companies. When a company needs to scale a business quickly but does not have the capacity to do so on a large scale. This is a huge problem for startups with limited ability to expand. When a company is in bankruptcy and has no other options to grow. This is a huge problem for startups that need to go public.
Why VCs are wrong to fear being shouted down
Let’s start with the elephant in the room, shall we? Shouting at a VC in the parking lot, on the street, or in his office will probably not cause him to change his mind. After all, most VCs are incredibly reasonable people. But those who do this are missing the point.
A large group of people will always be louder than a small group of people. And if the large group is blocking the entrance to the parking lot, the shouts will be heard loudest inside the vehicle. Shouting at a VC in the parking lot, on the street, or in his office will probably not cause him to change his mind.
After all, most VCs are incredibly reasonable people. But those who do shoutowness down are missing the point. A large group of people will always be louder than a small group of people. And if the large group is blocking the entrance to the parking lot, the shouts will be heard loudest inside the vehicle.
Early stage funding
Venture capitalists are investors who specialise in early-stage funding. They work with startups that have not yet gone public and have not yet raised money from outside investors. Early stage funding can take a variety of forms, including equity investment and debt. Equity investment is when a startup lends some of its shares to investors.
Debt financing is when the startup borrows money from a financial institution and uses that money to buy some shares. If the company goes public, the shares will be listed on the stock exchange and the ownership will change.
How to raise venture capital – the right way
If you’re interested in raising venture capital, you’ll want to choose the right firm. There are many firms that raise venture capital, but not all of them have the right contacts. Some will shout down anyone who disagrees with them, while others will ignore you and their consultants completely.
There are a few things to keep in mind as you choose a firm: A good general partner at a good firm will make or break a startup. If you want to raise money from venture capitalists, you want to choose a general partner who is as attractive as possible. A general partner at a bad firm is worth more dead fish in a bag than as a source of funding.
If you want to raise investment capital, be prepared to do a lot of legwork. You will probably have to go to a lot of investor events, attend a lot of finance Seminars, and speak with a lot of different people about your company. You will also probably have to write a lot of reports and analyses. All of this work will be worth it if you get the chance to raise venture capital.