Funding 101: Prep


Venture Capital Funding

Venture Capital funding is both the most commonly referenced and yet commonly misunderstood form of investor capital available.

Simply put, venture capital funding involves a venture capital firm investing a large sum of money (typically starting at $2 million or more) in exchange for an equity stake in your company.

Venture Capital Funding Risks and Rewards

Unlike banks or more traditional investment sources, venture capital funding is all about big risks and big rewards.

Venture capital firms specifically look for companies that offer an exceptionally large growth opportunity, which you can think of as the type of company that could go from inception to IPO in less than 10 years.

With big rewards, however, come big risks. These opportunities usually exist within the technology and healthcare sectors which are fiercely competitive and often highly speculative. Venture capital may be responsible for big hits like Google, Apple, and Facebook, but there are also hundreds of failed investments for every one of those hits.

Trading Equity for Capital

If you go to your local bank and apply for a loan, you're going to be asked to pay the principal back with interest. You're not going to be giving part of your company to a bank and you're not going to ever be asked for anything more than the principal and interest.

However if you go the route of venture capital funding, you're going to be trading your equity (a stake in your company) for capital and you're going to be asked to return a massive amount of money back (hopefully much more than 3 times the invested amount) in less than 10 years.

Entrepreneurs are typically less concerned about the payback amount or the time period than they are the equity and control they often give up to take on the capital. One lesson that gets learned quickly after taking venture capital funding - you'd don't get that equity back - ever.

Venture Capital Funding is In Short Supply

Although venture capital funding gets a lot of credit for financing the big publicly held companies that you read about in the papers, there are surprisingly few of them in existence and they fund a lot fewer companies than you would expect.

On average venture capital firms have accounted for about 4,000 deals per year (and declining substantially on average) and number just under 500 active firms in the United States alone. Quick math would tell you that the average venture capital firm funds less than 10 deals per year which is highly selective.

It’s Really Competitive

The scarcity of venture capital funding means there are far more deals than there are available checks. A well-known venture capital firm can look at over 1,000 pitches in a given month and make an investment in one, if that.

With that in mind, consider how this impacts your own pitch. You’re not just competing with good ideas – you’re competing with really good ideas from incredibly well-prepared entrepreneurs. To be one of the chosen few who stand out among all of those hopefuls you’ve got to put everything you have into making your deal shine. Next, read How Venture Capital Firms Work