Venture Capitalists (VC) are a subset of Private Equity Financing. In contrast to Angel Investors who invest their own money, VC’s manage a fund (pool of money), they raise the money from wealthy individuals, companies and pension funds. A VC firm will raise a fix amount, say $100 million and will use that money to make investments in companies. Usually VC’s will invest in the million-dollar range and will look to liquidate their investments faster, within 3-7 years. The VC firm will look for early exits, through IPO (Initial Public Offerings) or through the sale of the company.
By studying what VC’s do, we see the type of companies they are looking to invest in. They look for companies who have a high potential of growth, who are currently in early stage and are of high risk. But compared to the Angels who are prepared to wait longer to realize their gain , VCs are typically looking to make their gains faster and will want the company to exit early, hopefully through IPO or through the sale of the company. Nobody can guarantee 100% win, all the time, so these firms will spread their money through different companies, betting on the law of averages that some companies will be great successes.
Some of the companies may fail or may not do well, but there will be companies who will be big successes. VC’s will want to make a huge enough return from the big winners to more than offset the losses of investments made in the companies that failed.
So if you are a small bakery looking to grow bigger, VC funds may not be the best idea for you at the early stage. But if you have a product that may revolutionize the world, and you need to grow your company big at a fast rate, then you may want to look at this avenue of funding.
An Angel – VC Comparison
|Angel Investors||Venture Capital|
Companies need different type of funding at different stages of their development. You must know what is the best-suited form of funding for you when you look for it. The biggest mistake entrepreneurs make is to pitch for the wrong type of funding to the wrong people. As we mentioned last time, do your homework; study the type of investor and the company or individual you are pitching too, understand what they are looking for. Pitch to the investor that will not only understand your business, but will help you to build it up as well.