What is Venture Capital?
Venture capital is the act of funding a company, in most cases, a startup. Additionally, both parties will agree to specified terms. While business founders usually perform most tasks, it’s still common for VCs to get involved. Also, while monetary funding is mostly the case, there are still times where VCs or founders only seek or provide advising, guidance, or business knowledge.
In most cases, Venture Capital is a term famous for technology-based companies. For instance, in San Francisco, California, a place called Silicon Valley, Venture Capitalists play significant roles in different areas. As such, VCs are places to go for when a brilliant young engineer has an idea with a friend, colleague, or roommate.
While VCs are known for tech-related companies, there are also others covering different industries that exist. Companies like Allbirds, Vessi, and Manscaped are famous brands that started with a Venture Capitalist’s help. While these companies differ in products, revenue stream, and tasks, they all go through the same process. If you want to learn about that, please read through the end.
Regarding the idea of funding your startup, it’s still like other forms of investments. It means, while some founders ask for funding with solid sales figures, others only bring forward their ideas, talent, or prototypes. However, unlike other investments, VCs, in most cases, help a company grow, hire, plan, and reach new markets; think of it as hands-on funding.
Typically, investors belong in VC firms, where the name Sequoia, Bessemer, Y Combinator, and many others are the go-to of most entrepreneurs.
Why startups seek VC funding?
Startups seek VC firms’ funding due to their openness to new ideas, technology, and willingness to gamble into new ventures. Also, since these investors are experts and have met and invested in similar companies before, it’s easier to explain things and business models.
Apart from funds, entrepreneurs also love to receive investors’ guidance for their launch, operation, revenue streams, and many other things. Besides, as VCs are highly knowledgeable and have many connections in the industry, they can help startups to grow and sustain their business in the long run.
While solo investors (such as angel investors) or funding companies exist, VCs are the ideal place if one wants the experience, interested people, and higher chances of approval. For instance, if a tech company seeks a VC in Silicon Valley, chances are, if its product or solution is excellent, a panel will approve it. Think of it as explaining something to someone interested in the subject.
Yes, in the early days, startups’ main goals are to launch and sustain for years to come. However, given how frequently major companies acquire or absorb smaller ones, founders can aim for more users or customers to gain traction for an acquisition. Considering this, founders seek VCs funding not only for funds but also to play better, adapt, and compete in the industry.
The Venture Capital Process
Like other things, venture capital funding also has a thorough process. In detail, it should look like this:
1. Pitch, Evaluation, and Meetings
In the first stage, founders submit their business plan, pitch their idea, and deliberate with the VC. Also, if approved, they would have to attend follow-up meetings and discussions.
When the panel approves, the VC should meet with the company before investing. After that, the VC should wire money based on the agreed terms to the startup and the valuation of the startup.
Related: Venture Capital Term Sheet Guide
After investing, the VC will stay in touch with the startup. In detail, it can have a seat on the board and advise the company to come up with effective business decisions. Also, employing the VC’s connections to other firms or entrepreneurs, it can use that to help the startup grow.
4. Company’s Stake Participation
Finally, the VC will participate in important events for the company. An example would be IPO or Initial Public Offering on a stock exchange, buying and selling shares, funds dissemination to investors, company acquisition, and many more.
Related: what is a cap table?
Peak: Venture Capital Fund From The Netherlands
We invest smart capital in fast-growing highly-scalable marketplaces, SaaS or data startups in the European Marketplace, to accelerate their growth. Our focus has been on the Benelux (Belgium, The Netherlands and Luxemburg), DACH (Venture Capital Germany, Austria and Switzerland) and the Nordic regions (such as Denmark, Norway, Sweden and Finland) for early-stage startups.
Via our network and experience, we provide hands-on support to our portfolio companies. Whether it’s support with hiring the right sales employees, making the right online marketing choices, or raising a follow-up round, we contribute to our portfolio companies.
Related: what is pre-seed funding, what is seed funding
History of Venture Capital
In 1840, many Britain citizens bought public shares from a newly built railroad. However, investors lost their money while Victorian Britain seized the railroads. Next, in 1946, George Doriot founded the American Research and Development Corporation. George was French at birth, enlisted at the US military, a famous Harvard professor, and became known as the “Father of Venture Capital.”
The American Research and Development (ARD) invested in the Digital Equipment Corporation. It was in 1957 that VC and the electronics and computer industry first met. In 1959, Fairchild Semiconductor was the first startup launched with a VC’s help. Next, Northleaf, a VC firm, first invested in a company in 1969. As time passed, Northleaf held the longest-running firm’s record to offer investments.
In 1970, venture capital firms started covering more grounds, including personal computing and led the VC sector to become a sector class. Along with other independent firms, Sequoia, a prominent VC, launched in 1972. In 1978, the Venture Capital space reached its most important year, where companies raised around $750 million. Starting in 1980, VC firms helped many major technology companies like Apple Inc., Compaq, Electronic Arts (EA), and Genentech.
In the late 90s or the dot-com bubble, there was an overflow of cash in Silicon Valley, or San Francisco, California. Consequently, VCs quickly invested in startups, even those showing little promises. After this event, considering unfortunate results, VCs came up with more effective investment methods.