Venture Capital : from garage to unicorn
Revolut, Deliveroo, Blablacar, Slack and other so called unicorns raised money (BIG money) through VC.
Now you wonder what VC means ?
VC stands for Venture Capital, a very trendy word for a very simple concept : venture capital is funding that investors provide to startup companies that are expected to have long-term growth potential.
So yes, Venture Capitalists — investors who provide Venture Capital — are forecasting the future, how the different needs of the society are going to evolve, in order to invest in the right companies.
From startup to publicly traded company, the different stages of venture capital funding are the key milestones for any ambitious entrepreneur.
So, who is venture capital for ? I have an idea of dating app, can I ask for venture capital ?
I am sorry to disappoint you, but no. Or at least not now since you are just at the idea stage. Typically, venture capital goes to companies with an operating history under 2 years. « Operating history » means that they have already prototyped something and that their business plan is already quite defined.
However, note that venture capital has become a popular source of funding since startup often lack access to capital market or investment banks.
Well, you should now be asking yourself : Ok, so investors, with tons of money, invest in very young companies because they might, maybe, someday, grow huge ? There might be a big counterpart for these startups ! What do investors earn at this Finance me! game ?
And this is a very good question ! In fact, there are real downsides for startups receiving venture capital. One downside is : investors usually get equity* in the company; that means that they now own a percentage of the business.
With their ownership comes influence on the company’s decisions. Note that it can be interesting for young CEOs to get advice from their VCs on how to run the business.
Ok, so now I have my prototype of dating app, I have been testing it for a while with beta testers, and I have identified my market, how do I get funds for next steps ?
Well done, you can now enter the Venture Capital funding process ! — if you convince investors that your app is essential to the public ! —
Venture Capital funding is organised into rounds which consist in an increase of the funding at each round. Typically, Venture Capital funding can be divided into 5 stages, which roughly correspond to these stages of the company’s development :
- Seed stage : The very first investing round !
Usually, Seed-stage consists of modest amounts of capital — modest compared to the next funding rounds ! — provided to entrepreneurs to finance the early development of a new product or service. Typically, this capital is directed toward R&D, market research and developing a management team !
Step 1 : Done ! Now you have between $250’000 and $1 million to take your baby app to the next level and recruit your management team, congrats !
- Startup stage : Welcome to the trendy world of startups !
At this stage, companies are ready to begin marketing their product to potential customers — that is why it is necessary to identify his market at seed-stage —. At startup stage, you should now have your dating app prototype ready and operational, to show investors. Now, you will need capital to fine tune your product and conduct any remaining research necessary to support an official business launch.
- First stage :
First stage financing usually coincides with your market launch, when you are about getting your first users — and so, customers ! —. Typically, capital raised through first stage goes to sales, as well as increased marketing. To achieve your market launch, you need a much bigger investment, so the amount raised at this stage tends to be much higher than in previous ones !
3…2…1… Liftoff ! After this stage, you are propelled out of atmosphere, straight to the moon ! You now have your first customers, even your first profits if you are lucky enough. But now, it is time to think about the next stage !
- Expansion stage :
You enter this financing stage when your business is seeing exponential growth and needs additional capital to keep up with the demand. Capital raised through this stage is commonly largely used to grow business further through market expansion and product diversification. As you understand, at this stage, your dating app is a success ! But, you need to keep up with the demand and your former market will not keep growing forever, so you need to think expansion, and diversification!
- Bridge stage :
Already, you are reaching the end of financing process, you are at the last chapter, boss level… At this stage, your company has reached maturity.
Funding obtained at this round is typically used to support activities like M&A* or IPO*. At this time, as soon as you get public (shares of your company are now tradable on the financial markets), investors typically sell their shares (equity they had in your business since day 1 of the financing process) to get their money back.
This financing stage is very important for two reasons. First, you are now a publicly traded company, that means that from a handful of investors, you now have to satisfy thousands of independent investors ! Second, this is at this stage that your VCs — Venture Capitalists —make their return on investment; this is the moment they have been waiting all this time, since they invested in your company at day 1.
From developing your dating app in your bedroom, to being a publicly traded company on NYSE, you now know how Venture Capitalism works, and how powerful it can be.
- Unicorn : A unicorn is a startup company with a value of over $1 billion.
- Equity : A stock or any other security representing an ownership interest. This may be in a private company, in which case it is a private equity.
- M&A : Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets through various types of financial transactions. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved.
- IPO: An initial public offering is when a private company or corporation raises investment capital by offering its stock to the public for the first time.