Written by Faiz A. Rahman
When it comes to fundraising to grow your business, venture capital is one of the options for entrepreneurs. Raising funds from a VC can help entrepreneurs grow their business and scale it. However, not everyone is familiar with venture capital. Many still question what a venture capital firm is and how it works, especially those who have never raised from venture capital firms before or are first-time entrepreneurs. If you wish to raise from venture capital firms, this article will cover the basics.
What is a venture capital firm?
In the simplest terms, venture capital firms are firms that typically invest in private companies in exchange for ownership of the company, usually a small portion of it. For example, a VC Firm ABC invests $10 in your company, consequently the firm will legally have an ownership of, let’s say, 5 percent.
Additionally, venture capital firms manage an investment fund from investors, called Limited Partners, seeking private equity stakes in startup with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities. The firms generally expect return on investment within five to ten years through two forms of exit possibilities, one is an Initial Public Offering (IPO) in main stock exchanges another is through the sale of the company to a another company, usually a large and well-established company.
Why do venture capital firms exist?
Venture capital firms exist initially to help fund companies with a limited operating and financial history. These companies are also too small to raise capital in stock exchanges or public markets, secure a loan from banks or complete a debt offering.
On the surface, all the firms look similar. However, each firm is typically differentiated by a few elements:
- Stage of financing
Venture capital firms usually specialize in only certain financing stages. There are firms that invest only in seed stage or early stage, while other firms invest at later or expansion stage. However, several firms are stage-agnostic and invest at any stage as far as they think the company would have a compelling performance in the future.
- Industry/Sector focus
Some other venture capital firms invest in a special theme or industry/sector. There are firms that invest only in Software as a Service (SaaS), B2B or online marketplaces. Once again, however, it is not exclusive to every firm as a lot of other firms eventually diversify the risks by investing in different industries.
- Geographic focus
A lot of venture capital firms focus on certain geographic areas or countries. There are venture capital firms in Silicon Valley for example which only invests only in the US startups.-. In Indonesia for example, several investing firms invest primarily in Indonesian companies while some others seek to invest in the South East Asia region.
In this sense, it is important to understand different approaches from different firms in order to benefit the most the investment.
What does a venture capital firm provide?
Venture capital firms usually consist of people with technology backgrounds, business and financial training from investment banks or consulting firms, or with many years of industry experience. Beside funding, venture capitalists typically bring managerial and technical expertise as well as valuable contacts and networks to help grow the companies they invest in.
Startups which raise money from venture capital firms use the money in areas that will drive growth of the business. Usually, funding goes towards building out teams, sales/marketing and technology. Additionally, funding can also be used to expand to other markets or add business units.
Investment from the venture capital firms is intended to help startups cover current and future operating expenses, this way the founders do not have to worry about generating revenue to stay afloat and focus on growing and scaling the business, hiring A+ talent and focusing on building long-term profitable companies. In other words, funding from venture capital firms give startups the runway they need to eventually achieve profitability, the next round of financing or be acquired by strategic investor/other company or go public.
When you start thinking of going to venture capital firms to raise money for your company, make sure you do extensive research on which firms to approach and send your investment proposal to. Since every firm has different approach and characteristic, it is important to approach the ones matching your company needs and aspirations.
Convergence The Best Venture Capital in South East Asia region
At Convergence we believe in actively supporting our portfolio entrepreneurs through experience, network and capital. This means that you can expect our team of investment and operations professionals to work closely alongside the portfolio teams to help them scale their businesses. If you have a compelling business seeking venture funding please reach out to us at firstname.lastname@example.org