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. In most cases, monetary funding is needed. But sometimes VCs or founders only seek or provide advice, guidance, or business knowledge.
In general, Venture Capital is a term famous for technology-based companies. In San Francisco (California) a place is called Silicon Valley. Here, Venture Capitalists play significant roles in different areas. A VC is the go-to partner when a brilliant young engineer has an idea with a friend, colleague, or roommate.
VCs are known for funding and advising tech-related companies. Famous brands like Allbirds, Vessi, and Manscaped, started with VC’s help. Even though these companies differ in products, revenue streams, and tasks, they all follow the same steps in the funding process.
Funding your startup is like any other form of investment. Where some founders ask for funding with solid sales figures, others only bring forward their ideas, talent, or prototypes. But unlike other investments, VCs help companies grow, hire, plan, and reach new markets. You can think of it as hands-on funding. Typical and well-known VC companies are Sequoia, Bessemer, and Y Combinator.
Why do startups seek VC funding?
Startups seek VC funding due to their openness to new ideas, technology, and willingness to take a risk with a new venture. These investors are experts and have met and invested in similar companies before.
Entrepreneurs not only seek funding, but they also appreciate investors’ guidance for product launches and operational processes. As VCs are highly knowledgeable and have many connections in the industry, they can help startups grow and sustain their business long-term.
As compared to solo or angel investors, VCs are ideal if you need experience, a bigger network, or want higher chances of approval in the industry. If a tech company seeks a VC in Silicon Valley, chances are a panel will approve it if the product or solution is excellent. It’s always better to pitch your idea to someone interested in the subject.
In the early startup days, the main goals are to launch a product and sustain it for years to come. However, given how frequently major companies acquire or absorb smaller ones, founders can also aim for more users to gain traction for an acquisition. In this case, founders seek VC funding to also 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. Usually, the VC gets a seat on the board and advises the company to come up with effective business decisions. The VC’s connections to other firms or entrepreneurs also help the startup grow.
4. Company’s Stake Participation
Finally, the VC will participate in important events for the company. For example during an IPO or Initial Public Offering on a stock exchange. Or when buying and selling shares, disseminating funds to investors, or acquiring another company.
Related: What is a cap table?
Peak: Venture Capital Fund From The Netherlands
We invest smart capital in fast-growing and highly scalable SaaS companies or data startups in the European marketplaces. Our focus has been on the Benelux (Belgium, The Netherlands, and Luxemburg) and DACH (Venture Capital Germany, Austria, and Switzerland),. We also focus on the Nordic regions (such as Denmark, Norway, Sweden, and Finland) for early-stage startups.
With our network and experience, we provide hands-on support to our portfolio companies. Whether it’s hiring the right sales employees, making the right online marketing choices, or raising a follow-up round.
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. In 1946, George Doriot founded the American Research and Development Corporation. George was French at birth, enlisted in the US military, was 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 the help of a VC. In 1968 VC firm Northleaf first invested in a company. As time passed, Northleaf held the longest-running record for offering investments.
In 1970, venture capital firms started covering more grounds, including personal computing. This led to the VC sector becoming a sector class. Sequoia, a prominent VC, launched in 1972 along with a few other independent firms. In 1978 VC firms reached their most important year when companies raised around $750 million. Since 1980 VC firms helped many major technology companies like Apple Inc., Compaq, Electronic Arts (EA), and Genentech.
In the late 90s – also known as the dot-com bubble – there was an overflow of cash in Silicon Valley. VCs quickly invested in startups, even those showing little promise. Considering the unfortunate results, VCs have since developed more effective investment methods.