Diving into the world of Venture Capital (or "VC" for short) could be overwhelming for some to say the least. You are thrown into an ocean filled with experienced, endless acronyms, and an entirely unique approach to investing. Essentially, it all begins with believing in your strategy, and working with the relevant parties to bring it to life. Once you familiarize yourself with what the core aspects of venture capital are, it becomes much easier to navigate the world of VC investing.
This article will be your starting guide in understanding the world of VC, and eventually partake in it. Innovation and invention are major drivers to economies all over the world, and venture capital plays a key role in accelerating this growth.
So what is VC?
To put it simply, VC is a form of investment made by angel investors, institutional investors, and corporations into emerging companies (usually known as "start-ups" ). The start-up will receive a certain amount of money in the short term for their companies to grow, and investors gain wealth in the long term as the value of their investment increases in parallel. VC has come a long way, having started as a niche activity towards the end of WW2, and now becoming an industry that plays a key role in the economy. Just imagine, without venture capital, Google, Apple and even Amazon probably wouldn't exist or function the way they do today. Having a huge impact upon the world of commerce, venture capitalists invest ever-increasing amounts of capital every year.
What does it actually mean?
Venture capital is a private investment made into start-ups at an early stage. Such ventures, while risky, have the potential to turn a substantial profit if the start-up can offer an entirely new product or service, or successfully disrupt an underperforming industry. The capital itself is invested into small businesses by investors known are venture capitalists.
Venture capital can be broken down into five main components:
1.Seed Capital Stage
This is where the first stage of funding begins. At this stage, commonly referred to as a "seed round" or a "pre-seed round", it is not necessary for start-ups to have market-ready products available to raise funding. Instead, it is imperative that the start-up convince the investor of the viability of the product/idea. The prudent venture capitalist will consider the technical and economic feasibility of the product and should only fund the company if they are convinced in the worthiness of the idea. The funding goes directly into the start-up's initial stages of product development and market research.
Once the idea/product has been developed and verified for market fit, it is now up to the company to move on to the next phase, commonly known as the Start-up Stage. Companies should develop a business plan, begin to acquire customers, and fully market and advertise their products. Although still at an early stage of development, many start-ups have a prototype of their product available, which can be shared with the investor. Start-ups in this stage rely on venture capital to fine-tune the product and to expand the team.
3.Emerging Stage/First Stage
At this stage, funds raised from venture capitalists will typically be allocated to product manufacturing, sales and marketing, and acquiring the necessary equipment and facilities. This is the point at which the company moves from an idea towards a probability and will need a large infusion of cash to get their products out into the market.
4.Expansion Stage/Second Stage
The start-up's growth at this stage should be exponential. The company should be taking in revenue and focusing on increasing market share by expanding into different markets and by diversifying their product offerings. Capital should be allocated to these expansion efforts.
By this stage, if the company's products and services have been suitable within the given industry, the company might be considering going public. Funding that is invested at the pre-IPO Stage is focused to helping the start-up manoeuvre in the market, continue growth, and outperform competition through mergers and acquisitions. Ultimately the purposes is to place the company in the best position possible prior to a public offering.
Across numerous aspects of life, whether it is playing the violin, or practicing venture capital, preparation and practice are key. For both the start-up founder and the investor, understanding in depth the five core stages of VC will save you a lot of time, money, and disappointment. Allowing one's ideas or product to flourish from being a simple seed to a whole garden of accomplishments takes preparation, devotion, and most importantly your go-to venture capital guide.