In the world of technology startups, we often hear about venture capitalists. However, we rarely hear explanations about who they are, the role they play, how they operate and how they fit into the bigger funding picture. We're going to help answer some of those questions here, starting with the most obvious...
What is a venture capitalist?
A venture capitalist or 'VC' is, quite simply, an investor. They invest money in startups and high-growth companies in exchange for equity, or more commonly, a share in the company. They are in some ways similar to fund managers, but they are far closer to and more personally involved in their investments (the startups). They tend to specialise and invest within a particular area, for example technology sectors like fintech.
The return on investment varies, but on average it is expected that the money the VCs invest will be returned between five to 10 years after the initial investment, via the company exiting (selling to another company) or going public.
VCs expect the funds they invest in to approximately triple in value over that time. Although not all of their investments will succeed, VCs expect that by investing in a variety of firms they will spread the risk and find a few runaway successes to mitigate any failures.
How do VCs operate?
Most VC firms have associate and partner levels of employment. Associates usually meet with startups at the initial phase and find potential investments, while partners get involved when the deal becomes more serious.
An associate can be promoted to partner once they've generated solid returns to the firm. An average day for a VC would include meetings with companies, networking at various events and researching investments.
Where do VCs get their money?
Most of the money VCs use to invest comes from a variety of external sources such as pension funds, charitable foundations, insurance companies, wealthy individuals and international corporations.
The partners of a VC firm also typically invest their own money into the fund, although it is usually in single-digit percentages of the overall fund, with the majority coming from external sources.
How do VCs invest in startups?
VCs typically invest during what is called the 'Series A' round of investment. This is followed alphabetically by 'Series B' and 'Series C' rounds, which raise increasing amounts as they go and often involve larger numbers of investors at each stage.
Before that you get the 'Pre A' or 'Series AA' seed rounds, which are the earliest stages of investment with the most risk.
These rounds tend to raise less money than venture capital and include angel investing, family/friend backing and crowdfunding. Angel investors have some similarities to VCs, but they usually operate alone and provide a more advisory role.
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