What sort of startups do VCs invest in?
VCs tend to focus on investing in risky, innovative startups with high growth potential and crucially, founders with a vision they trust and that they believe can succeed. They also invest in companies that are a little older but at a stage where they have demonstrable results and are focusing on boosting their expansion. Given they invest huge sums into startups it is important that they believe there will be a high return rate if successful.
VCs are less likely to invest in firms that don't have aggressive growth plans, i.e. companies who prefer to focus on slower but steadier, solid business growth.
How do they decide where to invest?
Many VCs specialise within particular areas: technology or even sectors within technology like security, clean technology or fintech.
VCs will look at metrics like customer acquisition, potential size of the market, solid planning, product traction and customer lifetime value when weighing up a startup. However, at the earlier stage their main focus will be on the founding team and their vision for the business, and whether they offer a great product or service with high potential.
A lot of the success of an investment relies on a good VC/founder relationship where they are able to communicate openly, be flexible, and be able to cope with unplanned and potentially negative events - which is almost inevitable when launching a company.
What else do startups get in return from VCs apart from money?
Although the main focus tends to be on the money that VCs inject into startups, they usually provide far more than just cash. They can act as a sounding board for the founder or founding team's ideas, offer advice and provide access to their network, just to name a few advantages. Many of them have set up their own company and/or worked within the world of technology or investment, so have invaluable contact books as well as perspectives from personal experience.
How do you become a VC?
There is no single, clear path to becoming a VC, although they do all seem to have high levels of job satisfaction as a common thread.
Some VCs have backgrounds from business schools then investment banking, others have set up and sold their own startups, while others come from more corporate backgrounds. Many have previously been entrepreneurs and see it as a way to stay involved in the world of startups without setting up another business. It is also very common for VCs to have previously been angel investors, 'caught the bug' for investing in startups and decided to make it a more formal part of their career.
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