Success stories of businesses and entrepreneurs have a strong grip on our imagination levels. It is particularly true in the case of leading entrepreneurial endeavors -involving business owners and venture capitalists collaborating to amplify economic growth. While the stories are quite inspiring, the overall functioning of venture capitalists remains a mystery to many out there. Therefore, it is imperative for you to know about how venture capitalists work and their importance to your business.
What is a Venture Capital (VC)?
VC or Venture Capital is a form of private equity and a common variant of financing solution delivered by investors to small-scale businesses and startup organizations possessing a promising potential for ensuring long-term growth. Venture capital is usually derived from leading investment banks, affluent investors, and various other financial institutions.
It is not necessary for venture capital to take up the monetary form. It could also be made available in the form of managerial or technical expertise. Venture capital is usually provided to small-scale organizations having an exceptional growth perspective. Moreover, it is also provided to companies that have been successful in growing at a rapid pace while having the potential to continue growing.
While it is a risky endeavor for investors who are putting up funds, the overall potential for returns that are usually above average is quite an attractive aspect. For new ventures or companies having a smaller operational history (less than two years), the concept of VC or Venture Capital is becoming increasingly popular as well as an essential source for raising money -particularly if new businesses do not have access to bank loans, capital markets, or other relevant debt materials.
Understanding Venture Capital
In a typical deal involving venture capital, significant ownership parts of an organization are developed as well as sold to some investors in the form of independent limited partnerships. These partnerships are ultimately formed by leading venture capital firms. In some cases, these partnerships feature a group of similar organizations.
A major difference between VC and other forms of deals involving private equity is that VC focuses on emerging businesses seeking significant funds for the first time. On the other hand, private equity is helpful in funding large-scale and highly established organizations seeking equity infusion or an opportunity for founders of the company to transfer ownership stakes.
Things Venture Capitalists Want to Observe Before Investing
Before your business receives the desired amount of funding, Venture Capitalists will conduct due diligence by looking into specific aspects to fulfill the eligibility criteria.
- Potential of a Big Market: VCs would like to have knowledge about the market for the services or products your business is selling. Most importantly, they would like to know whether or not it is a big market. It is because VCs are here to support your growth. Moreover, big markets support ample growth.
Big markets are not only stable but are less inclined to volatility. Moreover, they are also capable of supporting the operations of several growing companies. If the market continues growing, it is even better.
- Uniqueness of Products: A unique service or product will be an attractive option. Unique implies something new & different while also being hard to replicate for any competitor. Your service or product range should serve as a secret sauce for preventing a competitor from ruling you out. There are several grounds on which your product or service can stand out -ranging from product differentiation to process differentiation, super niche differentiation, and price point differentiation.
- Presence of a Solid Management Team: A VC who is looking forward to investing in your property would want to be assured that the money they invest is managed properly. Therefore, possessing a well-organized management team with relevant experience is crucial. The VC will ask for relevant details about all members of the management team while meeting the players as well.
Bringing in the right venture capitalist for your startup funding will improve the likelihood of positive things happening. A top-tier Venture Capitalist is inherently valuable as winners help in delivering winners. Moreover, VCs tend to feature deeper and better relationships with bankers or financial institutions producing the IPOs. Thus, getting Venture capital funds is great for startups that require heavy investment. But if you are a D2C business looking for funds to meet your working capital needs, then VC funding won’t be ideal for you. To scale your business and stabilize your revenue, Revenue-based financing will be the best option for you to grow your business without losing any stakes in the company. You can partner with a revenue-based financier like Velocity to get funded within a week with a 100% online process.