How Venture Capitalists Venture
Did you know? Venture Capitalists get paid to manage others’ money.
If someone is investing directly in your startup, and they know and love the space, having more supportive than capital based intentions, call them an Angel Investor.
If someone is directly investing in your business and they want to see customers and focus on their return, call them an investor. A plain vanilla investor… don’t give them the courtesy of adding “Angel,” bundling them with venture capital when they behave like someone looking to diversify their retirement savings in business investments beyond the stock market, nor mincing the notion of a loan with venture funding.
A Venture Capitalist manages a Fund comprised of Limited Partners’ investment in the fund.
As such, they have understandable expectations that differ from other sources of capital:
- You must exit (generally). They have to deliver a return to their portfolio and they can only do that, with a private company, when they can sell their position. That happens when a private company gets acquired or goes public. You MUST exit. At some point. If you can’t or won’t, it doesn’t mean you don’t have a good business; VCs won’t invest.
- You must be capable of delivering a substantial return. Their portfolio absorbs losses and to overcome those losses, they bet bigger and need those bigger outcomes. You’ll hear VCs say anything between 15 and 25x. If they invest $1MM, will you exit returning them $20MM? Extrapolate that to appreciate why VC funded companies always seem big… if they invest $10MM, will you return $200MM?? Keep in mind, that means being worth MORE so you can return their portion. Obviously, this isn’t required, who knows what you’ll exit for, but CAN you? If you can’t, get an Angel or bank loan.
- VCs RAISE money. Yep. Mind-blowing for some. They raise it. They manage it. They allocate (invest) it. And just as you are raising money, so too must they. So while that ever import ROI is critical, there are many other things you might provide that enables them to raise money. Do you have a great vision, team, PR, or amazing product? Maybe that won’t massively exit but their investment in you is clearly wise… helping them raise more. You have to know where in the life of their fund they are; as their reaction to you is tainted by where they are in their process as a business.
VCs seem to be getting a bad rap lately for nothing more than behaving the way their supposed to. Many are referring to themselves as venture capitalists, misleading entrepreneurs and misdirecting startups. Be an investor, be an Angel, be a limited partner, or offer a loan; if in “Venture Capital” it’s valid to conclude that you’re responsible for investing in risky new ventures and delivering a substantial return on other people’s money.
