Venture Capital- Fuels Startup Growth

Can a startup get funding from venture capital?

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Venture Capitalists(VC) are a group of individuals with a professional CEO running the venture firms. VCs support startup growth from seed to much later stages.

“VC is about capturing the value between the startup phase and the public company phase.”-Fred Wilson

VC’s are looking to deploy millions of dollars, and they are looking for multiple times return on that capital.( 5 to 10X) That is why, in addition to founders, VCs focus heavily on the size of the market. If they do not believe the market is large enough, they will not invest.

Venture Capital

VC's are looking to fund projects that are unique and cannot be easily replicated-Elisha Hartwig (Associate Editor at Mashable's)

VCs are attracting a lot of attention in the USA as well as in India. The newspapers, and entrepreneur related magazines glamorize the growth of businesses where VC’s have invested. Rags to riches story of the entrepreneurs with a bagful of money from VC is tempting people to look at this opportunity.

VCs invest in excess of 1-3 million dollars in a  venture.

The entrepreneur has an innovative idea. The market has accepted the product or service as it had received seed funding from an angel. Can we assume that everyone who seeks funds from VC has a bright chance of hitting the jackpot?

Reality

USA:

Do you know, for example, that only 1 percent of funding for startups comes from VC firms? In contrast, 24 percent of businesses find funding from friends and family and more than 80 percent are self-funded. (http://www.entrepreneur.com/article/241331)

India:

Only 3% of startups are funded by VC..-( E-Cell-IIT Kanpur).

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Hit Rate

One of the well-known Indian angel networks receives 300-400 plans every month.  A Venture capitalist told me that only 1-2% of the proposals end up with funding from them.

Most venture capitalists will not read a business plan unless the entrepreneur is introduced to them by a contact.-: Guy Kawasaki

Since VCs deploy large amounts of capital and expect significant returns, the process of raising money from these so-called institutional investors is far from trivial.

Venture Capitalist’s Expectations
 (Courtesy:  Mr. Nagaraj Prakasam- A  VC & Member-Indian Angel Network)

The tagline of this VC: Commitment of Money, Time, Expertise & Networks

VC – Value addition

  1. Network’s multiple domain expertise enables exploiting opportunities across sectors
  2. Provides entrepreneurs strategic inputs, advice and mentoring with access to valuable networks
  3.  Opportunity to create disproportionate wealth for all stakeholders

At a Glance- What VCs look at

I. Current Status of Entrepreneur

  1. Clear definition of product or service
  2. Already developed or can it be validated?
  3.  Target  customer
  4.  Necessity of  product / service
  5. Is it “need to have” / “nice to have”
  6. Patenting status- if IP  based

II .Market

  1. Is it large and rapidly growing
  2.  Existing Competitors
  3. Strategy to deal with competition 

III. Future Plans

  1. Scaling up plan
  2.  Risks / mitigating plan

IV.The Team

  1. Track record
  2.  Coverage of skills – finance, technical, marketing, etc
  3.  Stock/compensation plan
  4. Board of advisors

V.Financials

  1. Current / Projected for the next 3 years
  2.  Break even period
  3.  Self investment & funding received till date
  4.  Investment sought
  5. Valuation expectation

VI.Exit  Plan

  1. Building an exit option is necessary
  2. Investors monetize their investment

Nuggets

1.       A  high risk- high return game

2.       Hit rate of getting funds is low

3.       Funding is for growth stage and is in excess of $ 1 million

4.      Criteria in respect of  market growth and entrepreneur capability- CRITICAL

5.       A  strategic partner

6.       Significant Wealth creation opportunity

7.       Entrepreneur  surrenders freedom