4 Things You Must Know As A Venture Capitalist

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Along with technology and oil refineries, venture capital has also lifted itself in terms of popularity, growth, and reliability. Without a doubt, the presence of risk is also prominent, but the structure and investment strategy are at the core of the subject. Moving back to the topic, the ones who form Venture Capital funds are typically entrepreneurs themselves, who have sold their startups and now have heaps of capital to invest! 

The Three Types of Venture Capitalists

Successful entrepreneurs define venture capitalism, as they provide much more than just money! As support, medium.com points out that:

“A good venture capitalist is a thoughtful, experienced ally, who sits alongside the entrepreneur as a partner and a mentor, knowing full well that their fate is intertwined. Most venture capitalists fall into the following three types — domain expert, operator or networker.”

(i) Domain expert: Investors only pour their money into startups that belong to the industry they have worked in. As a result, they not only have a competitive advantage, but they are also able to mentor and suggest changes in the company. Essentially, domain knowledge is nothing but expertise in a particular industry or field, that is related to the startup being invested in. Moreover, a domain expert is also capable of recognizing trends in the market and recent changes that take place. 

(ii) Networker: As the name suggests, a networker is an expert in networking, that is, introducing the startup, as well as the VC fund to knowledgeable individuals for partnerships and deals. Sometimes, networkers also introduce major corporations for merging or acquisition purposes. 

(iii) Operator: Operators are the ones who are reliable for growth. These handy individuals are reliable for recognizing the scale potential of a startup.

The 3 Factors Which Bring Returns

Share Purchase

Buying equity is the first activity that is associated not only with VC but all investment funds alike! The basic principle entails that as the startup under the VC fund grows in terms of returns, a certain percentage of their earnings direct;y flow to the fund. 

Acquisition (M&A)

Mergers and Acquisitions also make up for a huge chunk of VC fund returns! If you’ve read ‘Zero to One by Peter Theil, you may be familiar with the gigantic VC fund by the name of Andreeson Horowitz. In the same book, Peter mentions that Horowitz invested 250 000 USD in Instagram in 2010. And when it was bought by Facebook for a billion dollars, they earned themselves a mind-boggling profit of 78 USD million dollars, which is a 317x return! 

IPOs

If a startup under your VC fund goes public, there may be a hike in valuation as well as funding, resulting in indirect profit! 

A Guide to Investing in Startups as A VC

As you know, VC funds invest in early-stage companies, most of which have no proof of concept. So, on what basis should you, as a VC fund manager, invest in startups? 

Unlike private equity funds, which invest in established companies, you remain with no choice but to focus merely on a few factors: 

  1. Product: As the GP or investment advisor, the first thing you have to look at is the product. Ask yourself the following questions: what is the company offering to its customers? What is the practicality of the product in real life? How big of an audience can the product cater to? How much competition is there? And is the product still relevant?
  2. Management: After the product, have a look at the management strategies of the startup. Find out how capable the founder is by looking at their track record, capabilities, networks, and so on. Additionally, don’t hesitate to dig for problems in their daily operations and management techniques. Get to know everything!
  3. Market fit: Before approving their product, analyze the market or the industry to which the product belongs to. You should also find out if the market is ready for the product and if it really does solve an important problem by beta testing as well. Don’t just rely on assumptions!
  4. Financials: Other than performing your due diligence and calculating the risk involved, you can get on conference calls with the team, discuss their margins, valuation, and the number of employees they have!

Furthermore, I recommend reading magazines and browsing business news to know which companies recently got a new round of funding. Additionally, you will also receive information about new tech products being launched. The possibilities are endless, as there is such diverse information out there! 

Returns; The Ugly Truth

If you’ve read our previous blog ‘Venture Capitalism: Organised gambling that builds unicorns’, you know that running a VC fund is no piece of cake! In fact, in the way that is currently practiced, venture capitalism involves more risk private equity and the public markets combined as the Kauffman Foundation points it out.

Furthermore, psychologists point out that, unlike gambling, VCs deal with a tremendous amount of grief; more than the surge of joy that they experience due to the same magnitude of profit!

Read our previous article about the difference between private equity and venture capital fund HERE!

If you wish to know more about customer service, I recommend reading ‘The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs’.

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Writer: Neeraj Sawant
Editor: Evelyn Tobing

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